Why taxes must be factored in when evaluating returns, especially for high-income earners.
The new tax year started with a harsh awakening for some investors who have taken advantage of high interest rates and invested in money market and fixed deposit accounts. High interest rates offered on money market accounts, while seemingly good news at first glance, have translated into hefty tax bills for many. This is a crucial reminder that taxes must be factored in when evaluating returns, especially for high-income earners.
The allure of high rates ADVERTISEMENT CONTINUE READING BELOW Recent hikes in the repo rate have sent interest rates soaring. This means attractive returns on savings accounts, bonds, and other fixed-income investments. However, the South African Revenue Service isn’t oblivious to this windfall. The tax-free threshold for interest income hasn’t kept pace with rising rates. This means a larger chunk of your earnings gets clawed back by Sars. For high-income taxpayers, the marginal tax rate can further diminish the appeal of these seemingly high returns.Let’s say you invest R1 million at a new interest rate of 10%. That sounds great until you factor in a 45% tax bracket. Your after-tax return shrinks to a much less impressive 5.5%.
Making smarter investment choices ADVERTISEMENT CONTINUE READING BELOW So, what’s an investor to do? Here are some tips: High interest rates can be beneficial, but taxes significantly impact your bottom line. Before chasing those seemingly attractive rates, consult a financial advisor to create a tax-smart investment strategy that aligns with your goals.
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