Before you withdraw from the two-pot retirement system, it is essential that you understand the tax implications, including the impact it will have on your tax bracket. Picture: Freepik
Since the two-pot retirement system came into effect on September 1, 2024, many South Africans have made applications to withdraw money from their savings pot - but are they aware of the tax implications?
According to John-Paul Fraser, tax attorney, Tax Consulting SA, making a withdrawal from the savings pot can push taxpayers into a new higher tax bracket.
“It is definitely the case that withdrawals from a savings pot can push a taxpayer into a new tax bracket. This is the case as the withdrawals from your savings pot are seen as income in the same light as that of remuneration income,” Fraser said.
Paul Menge, Actuarial Specialist at Momentum Investo said that the tax rate that South Africans normally pay, the so-called marginal rate, is based on an income bracket or range.
If your current income is close to the top level of the bracket, your investment income from your two-pot retirement system withdrawal can push you over that level into a higher tax bracket, according to Menge.
Another way that you can be pushed into a higher tax bracket is if your salary is increased or you receive a financial windfall at any time during the tax year.
Sometimes, the combination of the two-pot retirement withdrawal along with the increase in salary can push you into a higher tax bracket.
Menge said that when the time comes for your annual tax assessment towards July, the South African Revenue Service (Sars) will look at your total yearly income, determine your tax bracket, and claim tax from you, based on the full picture.
You will have to pay more tax on the amount in the higher tax bracket based on you two-pot withdrawal and the rise in your income.
“The concern regarding this is that if you didn’t pay the higher tax when the withdrawal was made, you will have to repay this when you submit your annual tax assessment,” Menge said.
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