The Tax free savings account (TFSA)

Tax free?!

The glorious tax free savings account (TFSA) has been in effect since 31 March 2015 in South Africa and has made the hearts of savers and individual investors all warm and fuzzy. 

Yes. The government decided in one glorious move to give away free money in the form of tax breaks. This is an interesting phenomenon, as in general, being cash strapped, they actually want to get your money in their coffers.

Without further ado, let’s jump in.

The crux of the tax free savings account

The South African government has a huge issue – people are broke. Broke people are unhappy. And unhappy people chop off heads of the leaders (see the history of the French revolution).

To encourage saving (and counteract a mass tax revolt), the government encourage people to save money through a special type of account. I like to refer to this type of account as a wrapper – similar to that of an RA. What I can invest in is regulated by the wrapper.

Concerning a TFSA, the government wants you to save or invest – they don’t want you to lose your money. For this reason, you cannot invest in single stocks, commodities such as gold, oil or palladium and you cannot directly invest in another country.

There are many options that you are able to do though, including cash or equivalents and ETFs.

Restrictions on the TFSA

No investment or government is ever without restrictions or strings attached. The TFSA is no different. Here are some pointers:

  • You can only invest R 36 000 per tax year.
    • This means you can invest this money between 1 March and the end of February
  • You have a lifetime limit of R 500 000.
  • You need to be a resident in South Africa – not a citizen
  • You cannot deposit, withdraw and redeposit the amount.
    •  For example, if you put in R 36 000 on March 1st and withdraw R 20 000 a month later, you cannot deposit the amount back into your TFSA in the current tax year. You’ve maxed it out!
  • There are prescribed assets that you can invest in – e.g. you cannot invest in individual shares
  • If you go over your limit, you will be taxed 40% on every rand you put over the limit – DON’T DO IT!

No, you cannot invest in these directly

Where to invest my TFSA money?

There’s no easy answer for everyone. Many people prefer the stability of cash or equivalents (see article here on what this is!)

If you’re interested in stability and happy to never make more than 0.000000001 % above inflation, you can safely invest this at your local bank.

If you’re looking at making more than micro bacterial profit and you have time on your side – i.e. you can take a bit of risk without dying of hunger, other options are worth exploring.

One of these options is a TFSA wrapper with an ETF (Info on ETFs here!). Companies like Satrix and EasyEquities has an awesome offering where you can buy the top ETFs in your TFSA. 

Check these out! 

Transferring a TFSA

Many people have a TFSA with their bank. The bank offers a shockingly low rate of 4-5% interest rate. A quick Google will show you that you can invest the money in an ETF or similar. Never withdraw the money and redeposit it into a new TFSA.

The process is normally seamless unless you’re with Nedbank. They make it as difficult as possible – we’ve been battling for MONTHS.

If you’re planning on transferring your TFSA, the company that you’re transferring to will give you paperwork to fill out. They will send the filled out paperwork to the parties needed and handle the TFSA transfer on your behalf.

Once off or monthly?

I know this is a burning question, yet the answer is simple: If you have the money, invest it immediately! If you don’t, pay what you can monthly.

It’s not about timing the market – it’s about time in the market.

What's the catch?

The government wants you to save. 

And you need to be a natural person – not a robot or a company.

It’s important to note that the TFSA is only recognised in the context of South Africa. This means that if you invest in an ETF such as the S&P 500, you will still need to pay the dividends witholding tax in the US. It will be less than normal, as we have a tax agreement with the US concerning dividends – so you will not pay dividends tax on the South African side. 

Should I use my TFSA as an emergency fund?



Did I mention that you should not be using your TFSA as your emergency fund? 

Your TFSA is a one way street: money going out can never be put in. Once you’ve maxed out the money that you can put in, it’s done.



You might think that this would not be achievable, but remember that inflation and the government’s general tendency to not lift the allowable amount with inflation makes this little baby one of the most important investments to leave alone. 


The government is out to get you! 

They want your money.

Yet, they also need to look at national and consumer debt.

It thus makes sense to get things in place to help the humble residents not to make debt. 

Go now – and MAX OUT YOUR TFSA!

Happy investing!

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This Post Has 7 Comments

  1. Meter

    Hi Frugal,

    I have an access bond and put all majority of my savings in this account. How would you rate this vs. TFSA?

    1. frugallocal

      Hey there, well, in my opinion, it’s worth checking out a TFSA, as once you hit retirement, you won’t have a bond – and all excess money will have to be in cash. Currently, the first R 23 800 p.a. isn’t taxable, but anything more than that you will be taxed.
      In conclusion, for now a bond might be better, but as soon as you hit retirement, the TFSA would’ve been better – as you can only save 36k p.a. in this account.
      I personally do both!

      1. Meter

        Excellent, thanks!
        Once the Corona, work security, etc. dies down i’ll make a plan.

    2. Wouter

      Dave Ramsey advices to only start investing(in this case TFSA) once you are out of debt, excluding your house, and have an emergency fund of 3 to 6 months of expenses in place. That includes all consumer debt and your car loan to be paid up in full.

      Then you can start investing by maxing out your TFSA (R36 000 for the year or R3000 per month), and after that you can max out your RA contribution up to 27.5% of your taxable income preferably into a low cost, index tracking, passively managed provider.

      Then everything that is left, you can pay off your house early and pay it into your home loan.

      But if your salary is affected by the corona crisis, rather go into conserve mode for now. Cut all unnecessary spending and pile up cash into your emergency fund. Once it blows over, you can go straight back into the investing.

      1. frugallocal

        I quite enjoy his teaching and it makes sense. I don’t agree with the RA part, as people planning to retire earlier will jave their money locked up, which might not be in your best interest.

        In my opinion, debt (except for property) is evil and must be paid off asap.

        Also notice that the US environment and laws are a lot different, e.g. fees for investment, and no conversion fees from another currency.

        Thanks for your comment 🙂

  2. Mzantsi Boy

    This is an informative article.

    1. frugallocal

      Thank you!

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