For high-income executives, superannuation offers a unique opportunity to grow wealth in a tax-effective environment.
While many are familiar with concessional contributions, the lesser-known non-concessional contributions can play an equally vital role in building a robust financial future.
Understanding how to navigate these options can make a significant difference in your financial outcomes, not only during your working years but also in retirement and beyond.
The Power of Non-Concessional Contributions
Non-concessional contributions to superannuation are made from after-tax savings. While these contributions don’t reduce your taxable income like concessional contributions, they offer unique advantages that make them an essential part of any high-income earner’s financial strategy.
One key benefit is the higher contribution limit. With non-concessional contributions, you can contribute up to $120,000 annually, far surpassing the concessional cap. This flexibility is particularly valuable once you’ve already utilised your concessional limits, allowing you to continue growing your superannuation balance. Additionally, these contributions allow you to take advantage of superannuation’s low tax rate of 15% on earnings and capital gains, significantly lower than the personal tax rate of up to 47% that high-income earners face.
This tax-efficient environment not only accelerates the growth of your superannuation balance but also makes a tangible impact on your overall wealth. For instance, consider investments generating annual income: if held personally, they are taxed at your marginal tax rate (up to 47% including the Medicare Levy), whereas if held within superannuation, the tax liability is greatly reduced (at up to 15%). If you had $10,000 of investment income, the difference in tax savings would be $3,200). Over time, this difference can result in significant wealth accumulation.
When Non-Concessional Contributions Make Sense
For high-income executives, deciding when to make non-concessional contributions depends on several factors, each tied to your current financial position and long-term goals.
First, if you’ve already maximised your concessional contributions, non-concessional contributions provide a logical next step for growing your superannuation balance. By continuing to contribute within the non-concessional cap, you can fully leverage superannuation’s tax-efficient structure.
Next, your personal financial circumstances play a critical role. If your home loan is nearing full offset or you’ve established a healthy cash buffer, redirecting additional funds into superannuation can be a prudent move. This ensures you’re using excess funds to generate long-term wealth while securing the tax advantages of superannuation.
Lastly, non-concessional contributions are ideal for those who are comfortable locking away funds until retirement. While it may feel restrictive, the long-term benefits of compounding growth in a tax-effective environment far outweigh the short-term liquidity trade-off.
A Strategic Approach to Tax Efficiency
Beyond wealth accumulation, non-concessional contributions also offer unique tax advantages during retirement and for estate planning. The way superannuation is taxed when accessed or inherited can have significant implications for both you and your beneficiaries.
During retirement, accessing superannuation from age 60 allows you to withdraw funds tax-free. This applies to both regular income streams and lump sums, making it a highly attractive source of retirement income. However, the tax treatment of these funds changes when they are passed on to your beneficiaries.
Non-concessional contributions are treated more favourably upon inheritance. For adult children, these contributions can be received tax-free, unlike concessional contributions and earnings, which are taxed at up to 17%, including the Medicare levy. This distinction underscores the importance of careful planning when making non-concessional contributions.
For instance, it may be advantageous to isolate non-concessional contributions by directing them to a separate superannuation account or to a lower-income-earning spouse’s account. This approach allows you to preserve the most tax-effective benefits for your beneficiaries, ensuring that your wealth is passed on in the most efficient manner possible.
Connecting the Dots: Building a Comprehensive Strategy
The benefits of non-concessional contributions extend far beyond simple wealth accumulation. By integrating them into your broader financial strategy, you can achieve multiple objectives: reducing your current tax liabilities, growing your retirement savings more effectively, and planning for a tax-efficient transfer of wealth to the next generation.
However, these strategies require careful consideration and expertise. High-income executives face unique financial challenges, from managing liquidity to balancing competing priorities. This is where personalised advice becomes invaluable, helping you tailor your superannuation strategy to align with your individual goals and circumstances.
Take the Next Step
Superannuation is more than just a savings vehicle—it’s a powerful tool for building and preserving wealth. To explore how non-concessional contributions can fit into your financial plan, we’re here to help. At Executive Strategies, we specialise in providing tailored advice to high-income executives, helping you unlock the full potential of your superannuation while navigating the complexities of tax and estate planning.
Contact James Marshall at +61 (0) 7 3007 2080 or email contact@executivestrategies.com.au to schedule a personalised consultation and take control of your financial future.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.
