Sneaky tax trick with $3518 reward

Sneaky tax trick with $3518 reward

Australian superfunds have collapsed by over $45 billion in the first three months of 2022, and with inflation and interest rates rising, it seems like more pain is on the agenda.

Many investors are panicking, but the savvy investors are seeing this decline as an opportunity — one that can help them emerge from this period of upheaval stronger than they went in.

So is now the right time to invest in your super fund?

The current state of pension provision

In Australia, our Super Funds have significant exposure to the Australian and international equity markets, with the majority of Standard Super Investment Options holding over 75 per cent of their total assets in equities.

By 2022, the global stock market has declined due to sky-high inflation and rising interest rates, with the US stock market alone losing over $3 trillion ($4.3 trillion) and officially entering a “bear market.”

The Australian stock market has fared better but is still down over 13 percent year to date.

Stream more financial news live and on-demand with Flash. Over 25 news channels in one place. New to Flash? Try 1 month free. Offer ends October 31, 2022 >

With super funds holding a majority of their investments in equities, Australian super funds have seen the value of their investments fall. As a result, super fund members are seeing negative returns for the first time since the Covid market collapsed in 2020 – something that’s never comfortable.

what you need to know

The stock market goes through cycles, which has happened since markets began in the 15th century. Markets have phases when they rise and phases when they fall. But over the long term, we’ve seen the stock market continue to rise after every downturn in history.

Stock market cycles are based on the evolution of the economy and investor sentiment at a given point in time. Unfortunately, unlimited growth is not achievable, meaning that periods of market decline such as we are witnessing today are perfectly normal and should be expected by investors.

While it’s always worrying when your investments go backwards, there’s a silver lining.

If you thought a company was a good investment at a certain stock price six months ago, and that stock price has now fallen, you may see lower stock prices as an opportunity to invest at a discount.

If you invest while markets are falling, your investments will eventually benefit from the additional growth seen in the declining market as the market recovers.

retirement benefits

Aside from only investing while the markets are falling, contributing to your Super has some additional benefits.

Under current rules, you can make up to $27,500 in tax-deductible contributions to your superfund each year. This amount includes any funds your employer contributes on your behalf.

For someone earning the median Australian income of $90,916, your marginal tax rate plus Medicare levy is 34.5 percent. The tax on all deductible contributions to Super is 15 percent. So, working backwards, the tax benefit of contributing to Super is 19.5 percent.

For someone earning an average income of $90,916 in Australia, your employer would make mandatory current-year super-guarantee contributions of $9,456, which means you have room to make an additional $18,044 in tax-deductible contributions.

Based on a contribution of $18,044 and a 19.5 percent tax benefit, the tax benefit available to you this year is $3,518.

And all on top of the investment returns you receive.

Plus, once your money is invested in retirement, the maximum tax rate you pay on your superinvestment earnings is 15 percent. This is much lower than marginal tax rates, meaning your investments in Super can grow faster than money invested in your personal name.

What are the risks

Before you contribute to Super, you should know that your money is “locked up” until you can access your Super, which is 60 years old under current rules.

For all the younger ones, that’s a long time before you can access your Super, so you have to balance the benefits you can get from Super with the desire or need to access your money.

If you’re just starting out on your wealth-building journey, Super might not be the first strategy you want to go all-in with. However, given the advantages described above, it is worth considering.

You should also be aware that markets can always fall further in the short term, especially if the global economy continues to weaken due to the current environment of rising interest rates.

To become familiar with both of these risks, there are a few things you should do before jumping into a super strategy.

First, you should be clear about your overall money plan and how great it fits into it. This allows you to ensure that the money you invest in Super is not needed for your other money goals.

Next, you should take the time to understand your superfund investments. This gives you the confidence to stick to your strategy when market conditions change and especially when they deteriorate.

The only time you really lose on an investment is when you sell it. So make sure you have investments that you can hold until you see good performance.

The case

It never feels good to see your investments going backwards. But if you let panic and fear set in, you could be missing out on a serious opportunity.

Markets will reverse, it’s just a matter of when. The question to ask yourself is what position you want to be in when that happens.

Ben Nash is a financial expert, commentator, podcaster, financial advisor and founder of Pivot Wealth and author of the Amazon bestselling book Get Unstuck: Your guide to creation a life not limited by money.

Ben has just launched a series of free online money literacy events to help you get back on track financially. Here you can see all the details and book your place.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal goals, financial situation, or needs. You should therefore consider whether the information is appropriate to your circumstances before acting on it and, if necessary, seek professional advice from a financial professional.

Read related topics:tax time

#Sneaky #tax #trick #reward

Leave a Comment

Your email address will not be published.