Non-concessional super contributions

Hi guys,

Hope everyone is having an awesome weekend

I started looking today at Aussie Firebug's calculator, which seems like an awesome FIRE tool, especially because it is specifically tailored for Australians. I think it makes perfect sense and it made me realise that the two phase approach to retiring early (pre-super and super phase) is probably the quickest way to FIREing. See the link below.

Australian Financial Independence Calculator - Aussie Firebug

If I understand all of this correctly, it is always a good idea (once you reach the pre-super number, e.g. you portfolio outside of super is large enough to cover your living costs until the super preservation age) to max your super contributions. I have already maxed my concessional contributions (27.5k), but it would make sense to me that all my future savings should go towards non-concessional contributions. Could you please confirm if I misunderstood anything here?

With non-concessional contributions, I obviously won't have any tax savings. However the benefits are:
1. I won't have to pay any CGT once I start drawing super (unlike my portfolio outside of super),
2. Dividends within super will be taxed at only 15%.

Of course, there is a risk that the Government increases the super preservation age from 60, so I would need to ensure that the portfolio outside of super can cover my living costs until I am 65.

Your thoughts would be much appreciated

 

You can pay less tax with earnings outside super, you can earn a taxable 50k and have lower tax rate than you do inside as their is no tax free threshold inside. Then you can get may be an other 50k that isnt taxed by offsetting gains from scaling down overweight positions with losses ,and selling stock that have had little gain, and by claiming some depreciation on property. You also have franking credits.

 

But once super is in pension mode there is no tax.

 

Personally speaking, with the way that successive governments have messed with super rules since it was started, I am not adding any more than I need to.

Which still leaves a reasonable sum in that bucket regardless, as I have been a salary slave for many years...

 

Are there specific rule changes that have influenced your decision?

Aside from the preservation age change from 55->60 where they gave over 20 years notice, I can’t think of any negative rule changes other than those that restrict contributions giving all the more reason to get money contributed ASAP.

 

There is a case for swapping that order, contributing to super first where it can compound in a low tax environment and then switch to saving outside of super to fund early retirement until you can access your super

 

A fourth pot for your retirement plan | Bruce Brammall Financial
For your info. This is the order I follow to max out benefits. I think Nodrog kindly shared previously.

Unless I miscalculate: a couple maxing out super @1.7 mil/each plus $1mil in shares outside super would pay no tax in retirement . So close to $4.5 mils tax free on earnings/income

 

I would have concerns that the calculator isnt provided by a licensed financial adviser and falls in the class of concerning financial advice ASIC have warned about. Its fatally flawed. It contains an assumption that asset values will rise in a linear manner continually without losses at any time. ASIC and all competent advisers would consider that adverse markets and events occur at different times. eg The GFC saw 11 years for the index to recover to its pre-GFC levels and then in the period 2018-2021 its experienced revcover, a major correction aftre March 2020 and unprecedented recovery mislabelled as growth by some in July-Sep 2020

 

If you contribute non-concessionally, you don't pay any tax on gains in the fund whilst in accumulation mode. That's the advantage.

 

I believe unless in pension mode from 60, tax on earnings at 15% and capital gain at 10%

 

From First Super: "Non-concessional contributions (contributions made from your post-tax income) do not generally attract tax, as you have already paid tax on your income. "

 

Unsure on your age and time line, but your two points above assume government won't change these Super rules in the future.. but who knows?
Build your financial wealth outside Super first then supplement with Super, that would be my advise, that's what we did.

 

It sounds promising that they have lots of notice before those changes. Would that mean that people who were in their late 30's were able to keep the old preservation age rule (55)? Would you have a link where they talk in more details about the historical changes (I'm keen to learn)?

 

Thank you mate! If I understand this correctly, it's important that the portfolio outside of super can cover one's living expenses until the preservation age. Once that condition is met, one can invest non-concessional contributions to super.

 

Outside super for leverage, inside for tax benefits. A reasonable heuristic, not always right but pretty close. Super is awesome, so is negative gearing. I built super first then outside, but I imagine if on a lower salary and young the benefits of leverage might be more suitable. Different horses for different courses.

The government have been great with super. I've been doing it 25 years and seen nothing concerning to me.

 

This means they are not taxed when going in, however any dividends and capital gains are still taxed as Anne11 mentioned.

 

Here is the original press release from 1997. I suggest 28 years is ample time for people to adjust their retirement strategy.
https://archive.budget.gov.au/1997-98/press_releases/pr40.pdf

 

Thanks so much! So any capital gains within super (if I sell shares) before the preservation age are taxed at 10% (I most likely won't be selling so shouldn't apply to me)? And could you please confirm, that once preservation age is reached, no tax is paid on earnings and CG?

Also, the above is true for both concessional and non-concessional contributions?

Thank you

 

For those who were born prior to Jul 1964 I believe that the preservation age is 58, for others younger like myself at 60: if meeting the condition of release eg ‘cease an employment and turns 60’ and commencing the pension : then no tax on earnings nor gains and the pension income does not count as taxable income at all. How good is that ?
When can I access my super? | QSuper

 

Withdrawing your super and paying tax