Superannuation is undoubtedly a tax effective way to save for retirement; therefore it makes sense to consider making extra contributions to super at any time - especially in the years leading up to retirement.
However, if you aren’t aware of the rules, those extra contributions could come back to bite you.
The Government wants to encourage people to save for retirement, but at the same time they don’t want people treating superannuation as a tax haven. That’s why they’ve placed caps on both ‘concessional’ (before tax) contributions and ‘non-concessional’ (after tax) contributions.
The concessional contribution cap is currently $25,000 per year, although a transitional arrangement allows people aged over 50 to contribute up to $50,000 per year until 30 June 2012.
The non-concessional contribution cap currently sits at $150,000 per year. However, in any year it’s possible to ‘bring forward’ your next two years’ contributions enabling a total contribution of up to $450,000. Past contributions need to be monitored carefully if using the ‘bring forward’ rule, as it’s critical not to contribute more than $450,000 in any 3 year period.
People saving for retirement can’t afford to be blasé about these caps, as breaching them can result in substantial tax penalties.
Excess concessional contributions are taxed at 31.5%, with the amount of your excess contribution also counting towards the non-concessional limit, and excess non-concessional contributions are taxed at 46.5%.
Members of self managed super funds (SMSFs) need to be especially vigilant about these caps. According to the Australian Taxation Office (ATO), more than 65,000 tax payers breached the SMSF contribution caps in 2009-10.
The ATO is obliged to impose the additional tax penalties even if the excess contribution is a genuine mistake, although a 2011 Federal Budget proposal may help to alleviate this problem.
From the 2011-12 financial year, the Government plans to give members the option to withdraw up to $10,000 of excess concessional contributions without penalty. However, this dispensation will only apply for a first-time breach.
The potentially serious consequences of breaching the contribution caps highlight the importance of good financial advice.
If you are looking to maximise your retirement savings, you need to be aware of changing legislation and can’t simply focus on the current year’s contributions. As well as helping to stay within the prescribed limits, a financial adviser can help you select and implement the most appropriate strategies for your situation.
For further information contact Hugh Kilpatrick* from RI on 03 9471 0080.
*Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This editorial does not consider your personal circumstances and is of a general nature only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances.
