Retirement fund members are often surprised to find they are taxed on withdrawals from their savings pot under the two-pot retirement system.
It is easy to forget that you enjoyed a tax saving when you contribute to incentivise you to save and provide for your own retirement.
In order to dissuade you from spending your retirement savings before retirement, the tax policy is to take away the incentive you got for putting money in your retirement fund if you take it out before retirement.
This video explains why and how retirement savings pot withdrawals are taxed.
This video is also available on YouTube.
Or you can read the transcript below.
(Full transcript)
When you contribute to a retirement fund you get a tax break from the Government as a reward for saving.
Your taxable income is reduced by the amount you contribute and as a result, you pay less tax.
BUT
“The tax incentive you get for saving is reversed if you withdraw money before your retirement”
Under the two-pot retirement system rules, if you withdraw from your savings pot, you will have to effectively pay back those tax savings.
This is why the money you get out when withdrawing is usually less than you expected.
SARS gave you a tax break when you were saving for your retirement.
If you withdraw it early, you have to effectively pay back the tax saving.
And remember:
you enjoy a tax deduction at your marginal or highest tax rate, so when you withdraw from the savings pot, you pay the tax on the withdrawal at your marginal tax rate.
You pay tax at different rates on your income, depending on how much you earn. Your marginal tax rate is the highest rate at which you pay tax on a portion of your earnings.
Imagine your income flows into buckets.
The first bit flows into a bucket with no tax applied. When that is full, it flows into the bucket with the lowest tax rate. When that is full it flows into the bucket with the next highest tax rate and so on.
Income in the last bucket is taxed at your marginal tax rate.
Your savings pot withdrawal will be added to your taxable income for the year.
That means it counts as income and may push you into a higher tax bracket.
Your vested pot consists of your retirement savings made before the two-pot system started on 1 September 2024.
There are different tax rules for withdrawing from your vested pot. You can only withdraw when you leave your retirement fund on resignation, retrenchment or dismissal.
The tax rates that apply to these withdrawals are known as the retirement fund lump sum withdrawal rates.
In terms of these rates the first R27 500 is tax free. Any amounts above this are subject to tax.
Only in a genuine emergency.
And if you really need to withdraw from your savings pot, try and pay it back as soon as you can.
Then you may enjoy a tax deduction again – and this will get your retirement savings back on track.
Read more about tax and your retirement savings pot on www.smartaboutmoney.co.za
