Tax benefits: Retirement Annuity or Tax Free Savings Account

Tax benefits RA TFSA

Saving for retirement is a big one for most of us, and deciding which route to go usually involves weighing up which option would make the most sense for us from a tax point of view. You heard right, saving for retirement has some tax perks – and who doesn’t love those! Some people use a tax free savings account (TFSA) as a way to save for retirement, while others prefer to contribute to a retirement annuity (RA). Here’s a quick look at the difference in tax benefits between the two types of accounts. 


There are two ways in which RA contributions can be made. Your employer may do this on your behalf as part of their payroll process, in which case your contributions are done before any tax deductions have been made on your salary. The tax benefit which you receive from an RA happens automatically in this case and you are given a rebate of up to 27,5% on your contribution (up to a maximum of R350 000 per annum). 

You can also contribute to an RA on your own, DIY style, on EasyEquities which means you would make the contribution into your RA after your salary had been taxed and landed in your bank account. You would then need to apply for a rebate which can be up to the same 27,5% amount when you do your tax return, and is also subject to a maximum of R350 000 per annum. 

Here’s an example of how this would work if you were to invest in an RA on EasyEquities:

Let’s say you earn a gross salary of R10 000, and the tax you pay on this amount is approximately R665. Once you have received the R9335 net salary amount and were to contribute R300 towards a managed portfolio (bundle) in your RA, you'd be left with R9035. Fast forward to the end of the tax year when you are doing your tax return, SARS will have a little rebate on that R300 contribution you’ve made, and so you’ll get some of that money back.

The money you have invested in an RA, like any investment you make, has the potential to grow by harnessing the power of compound interest. As your investment grows you would normally need to pay certain taxes on the profit you make as a result, but within an RA the growth, including interest income, dividend income and capital growth, is tax free. However, once you reach retirement and are able to draw an income from your RA, you'd be subject to income tax on that amount each month as well. 


A TFSA is similar to DIY investing in your RA in that the amounts you deposit into your TFSA and invest with are made from your salary after all tax deductions have already been made. The difference here is that you won’t get any tax rebates when you apply for your tax return.

As is the case with an RA, once you have deposited funds into your TFSA and you go on to invest them in ETFs or managed portfolios, there is the potential for your investment to grow over time. All of this growth, including interest income, dividend income and capital growth, is tax free in a TFSA. You won't, however, be taxed on the amount that you withdraw from your TFSA once you are ready to access it. 

Tax isn't the only consideration to make when it comes to deciding which account is the right one for you, read more about the other benefits associated with each account in RA or TFSA – which one is right for you?