Contributing to superannuation to reduce tax
Contributing to your superannuation is like giving your future self a boost while saving on taxes today. Here’s how it works:
Tax Rate Advantage: When you contribute to your super, you typically get taxed at a lower rate (15%) than your marginal tax rate. So, if you’re in a higher tax bracket, this is a great deal. You’re effectively reducing your taxable income now by putting that money into super instead of just letting it sit in your regular income bucket.
Concessional Contributions: These are the contributions made by your employer (super guarantee), or from your pre-tax income, such as salary sacrifice arrangements. By salary sacrificing a portion of your salary into your super, you reduce your taxable income. Less taxable income means less tax paid overall.
Tax Deductions for additional Personal Contributions: If you make personal contributions to your super (and you’re eligible), you can claim a tax deduction for those contributions. This means you can reduce your taxable income even further. Just make sure you notify your super fund of your intention to claim a deduction. You’ll need a ‘notice of intent’ certificate.
Investment Earnings: The money in your superannuation fund is also taxed at a lower rate on investment earnings (generally 15%). So not only do you save on tax when you contribute, but your money can grow more efficiently because it’s being taxed less while it’s in super.
Tax-Free Withdrawals Post-Retirement: Once you retire, withdrawals from your super can be tax-free, provided you meet certain conditions, and limits. So, you’re not just saving on taxes now, but you’re also setting yourself up for possible tax-free income later.
In summary, contributing to superannuation allows you to reduce your taxable income now, benefit from lower tax rates on investment earnings, and potentially enjoy tax-free withdrawals in retirement.
If you want more specifics or have questions about how to maximise your contributions, just contact me paul@congdonfuzi.com.au