HOW TO MAXMISE YOUR CONTRIBUTIONS
PUTTING MORE IN TO SUPER
Once you have consolidated your Super and it's working hard, it’s time to maximise your contributions.
Check how you are tracking using the Life Sherpa Super Benchmark for your age. If you are falling behind or have spare cash that you are happy to lock away until retirement, you should consider making additional contributions. This is a very tax effective way to save.
THE SUPER CO-CONTRIBUTION SCHEME
The Superannuation Co-contribution scheme can give your Super a free kick. The Government will put (up to) an extra $500 into your Super Fund if you contribute $1 000 and are eligible. How else can you get a 50% instant return on your money with no risk? The scheme is aimed at low to middle income earners (those that earned less than $49 488 in 2014/15).
If you earn $34 488 or less, make an after-tax contribution into your Fund and the Government will chip in another $0.50 tax free for each dollar (up to $1 000). The $0.50 Government contribution is reduced by $0.0333 for every $1 000. If you earn over $34 488, it reduces to zero at $49,488. This is an attractive way to boost the Super account of a low income working spouse.
Did you know that you can contribute to your Spouse’s Super as well as your own? Make spouse contributions on behalf of your spouse if you have a Spouse who is under 65 and earns less than $13 800. It is also available for Spouses between 65 and 69 who are working. You must both be Australian residents and be living together.
How does it work?
If you make up to $3 000 in after tax contributions to your Spouse’s Super account (and your Spouse earns less than $10 800 per year) you will get a reduction on your tax bill of $0.18c for every dollar you contribute. This means you will get $540 if you contribute the full $3 000. A reduced refund applies if your Spouse earns more than $10 800 but less than $13 800. This is an attractive way to boost the Super account of a low income working spouse.
HOW TO MAKE TAX DEDUCTIBLE CONTRIBUTIONS
One of the great attractions of Super is the ability to contribute money ‘Pre Tax’, pay a low rate of tax on the returns, and then withdraw it all tax free once you turn 60. This can make for a better return than paying off your home loan. For example, someone aged 50 who earns $85 000 and gets a $1 000 pay rise can direct the increase to their Super fund, or to take it as income and reduce their home loan.
Taking it as income would leave $615 after tax. This could be used to make an additional home loan repayment at an interest rate of 5% which saves him interest.
Directing it to Super would deliver $850 after tax into the Super Fund. Even if this money was simply placed in the bank at an interest rate of 3% on which the Super Fund will pay tax at 15%, it can generate better overall results than paying off the home loan.
Doing this for 10 years would result in $8 956 paid off the home loan or $10 774 in additional tax free super – a 20% better outcome. The higher the tax rate, the better the outcome for Super. The down side is that once money is put into Super it cannot be withdrawn until retirement (with a few minor exceptions).
Sherpa says: Ask your employer to make additional super contributions instead of paying it all as salary.
Only contribute money you're sure you won't need before retirement, and you have made a good start on your home loan before you consider an accelerated contribution strategy.
The annual limit for these concessional contributions is $25 000.
Ask your employer to make additional super contributions instead of paying it all as salary. This is known as Salary Sacrifice. Your employer is not obliged to agree but most do.
Alternatively, you can make the contribution and and claim a
tax deduction in your tax return.
HOW TO GET STARTED
1. Update your details in MyFinancialLife
2. Ask your Sherpa for a Super Review