How is tax applied when withdrawing from an RA with a value under R247k?

Dear reader,

Thank you for your questions.

An RA is a type of investment that allows you to save money for your retirement in a tax-efficient way. Contributions to your RA can be deducted from your taxable income, lowering your taxes due to the South African Revenue Service (Sars).

Additionally, investments in an RA are not subject to capital gains tax, tax on interest, or dividend withholding tax. Your RA is not fully tax-free, however.

The cash portion you receive from your RA is deemed as taxable income. As your personal income tax rate is very likely to decrease after retirement, the taxes due to Sars will also decrease. An RA thus allows you to reduce the amount of taxes paid when your tax rate is high, ignore the taxes on the growth of your investment, and then pay taxes at a much lower tax rate after you retire.

While most taxpayers understand the basic concept of an RA, there are certainly some technicalities which do cause a degree of confusion. I will attempt to answer your questions as best as I can below.

Question 1: Is there any limitation on how many RAs you can have?

You can open as many RAs as you’d like. You are, however, only permitted to invest up to 27.5% of your taxable income per year (capped at R350 000). This limit is applied to all of your RAs in aggregate, not individually – that is, you can invest 27.5% of your taxable income into either a single RA or across multiple RAs.

If you were to invest 15% of your taxable income into one RA and another 15% into a second RA, you would be 2.5% over the limit. In this situation, the 2.5% would be rolled forward, which would reduce your 27.5% in the following year to 25%.

Question 2: With current rules, if the RA is less than R247 000 it can be paid out in full. How is tax applied? Is it taxable or is it deemed tax-free because it is a retirement product with the first R550 000 being tax-free?

If you are below the age of 55, and your total investment at that point is worth R247 500 or less, you can withdraw the full amount in cash. The first R27 500 of the lump sum withdrawal is tax-free, and the remaining amount is taxed according to Sars’s withdrawal benefit table (see Figure 1).

If you are older than 55, you can withdraw a third of your retirement funds in cash while the remainder must be transferred into an annuity. The lump-sum cash portion will be tax-free up to R550 000, which is a lifetime limit. Once you have utilised this tax-free amount, any subsequent withdrawals will be subject to tax according to the withdrawal benefit table (see Figure 1).

Figure 1: 2024 Tax year withdrawal benefit

Question 3: For multiple RAs with values below R247 000: How is the R247 000 payout handled in terms of tax? Does it mean all the RAs are tax-free or does the once-off consideration of R550 000 apply to all the RAs? 

In this case, a person would only be able to withdraw the funds from one of their RAs, as the R247 000 threshold is a once-off consideration for certain product providers. Some product providers may allow you to withdraw from each RA if the value has dropped below R247 000. You will need to consult with your product provider in this matter.

RAs are a good product to use while preparing for your retirement. They reduce your current taxes while also reducing your future taxes.

This allows you to save more money towards your financial goals. The downside of these investments is the restrictions regarding the withdrawal of your funds.

I hope the above answers your questions. Should you require further assistance, please do not hesitate to contact our offices.