Friday, July 01, 2011

Non-concessional Superannuation Contributions

Does it make sense to make non-concessional superannuation contributions? These are after tax contributions to a retirement account in Australia. In other words, the money is taxed at your marginal rate and then put into a retirement account and locked up until you are least 60 (if you are born in 1964 or later as I am). The advantage is that the tax rates on earnings are lower than in non-retirement accounts for high income earners. Instead of a 38.5% marginal tax on regular income (interest, unfranked dividends, and short-term capital gains) there is a 15% rate and the long-term capital gains rate is 10% instead of 19.25%. Of course, for so called "franked dividends" the effective tax rate is 8.5% outside of super and 0% in super. So, do the lower tax rates make it worth locking up the money for 14 years at least (in my case)? I'm expecting to pay zero capital gains tax for a while given accumulated losses and after interest and expense deductions I don't pay any tax on dividends anyway. So, I think the answer is no in my case, for the moment. My employer will be putting almost the maximum pre-tax contribution allowed into my super anyway.

When I get nearer retirement age I expect to stuff the maximum allowed non-concessional contributions into my super account for a few years. This is because there is zero tax on earnings once the super account is paying out distributions.

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