Superannuation is one of the most effective ways to save for retirement in Australia. However, to make the most of your superannuation, it’s important to understand the two main types of contributions you can make: concessional contributions and non-concessional contributions. Both offer benefits, but they are treated differently from a tax perspective and have different rules regarding limits and eligibility. In this post, we’ll break down the differences between concessional and non-concessional contributions, their annual caps, and age restrictions to help you make informed decisions about your retirement savings strategy.
Concessional Contributions
Concessional contributions are before-tax contributions made to your superannuation fund. These include employer contributions (such as the compulsory Superannuation Guarantee), salary sacrifice contributions, and any personal contributions for which you claim a tax deduction.
Key Features of Concessional Contributions:
- Tax Treatment:
- Concessional contributions are taxed at 15% when they enter your superannuation fund, which is often lower than most people’s marginal tax rate. This makes concessional contributions tax-effective for those seeking to reduce their overall taxable income.
- For high-income earners (those earning more than $250,000 per year), an additional 15% tax applies, bringing the total tax on concessional contributions to 30%.
- Annual Cap:
- The annual cap for concessional contributions is $30,000 for the 2024-2025 financial year. This includes employer contributions as well as any additional salary sacrifice or personal deductible contributions.
- Carry-Forward Unused Concessional Contributions:
- If you haven’t used up the concessional contributions cap in previous years, you can carry forward any unused portion for up to five years, provided your total super balance is less than $500,000 on June 30 of the previous financial year. This is a great way to “catch up” on contributions if you weren’t able to contribute the maximum amount in earlier years.
- Age Restrictions:
- If you’re under 67, you can make concessional contributions without meeting a work test.
- If you’re aged between 67 and 74, you must meet a work test or qualify for the work test exemption to make voluntary concessional contributions.
- If you’re over 75, concessional contributions can only be made by your employer (e.g., Superannuation Guarantee contributions).
Non-Concessional Contributions
Non-concessional contributions are after-tax contributions you make to your super fund. These contributions are not taxed when they enter your super, as you’ve already paid tax on this money. Non-concessional contributions can be made in addition to your concessional contributions to boost your super balance.
Key Features of Non-Concessional Contributions:
- Tax Treatment:
- Non-concessional contributions are not taxed upon entering your super, but there is no tax deduction available for these contributions.
- Annual Cap:
- The annual cap for non-concessional contributions is $120,000 for the 2024-2025 financial year.
- If your total super balance is $1.9 million or more, you cannot make any further non-concessional contributions.
- Bring-Forward Rule:
- If you’re under 75 years old and wish to contribute more than the $120,000 annual cap, you may be able to access the bring-forward rule. This allows you to make up to three years’ worth of non-concessional contributions in one year (up to $360,000) without exceeding your cap.
- The bring-forward rule applies over a three-year period, so if you contribute the full $360,000 in one year, you won’t be able to make further non-concessional contributions for the next two financial years.
- Your ability to utilize the bring-forward rule is restricted once your superannuation balance exceeds $1.66 million.
- Age Restrictions:
- As of July 1, 2022, the bring-forward rule can be used by individuals under the age of 75, provided they meet the total super balance requirements.
- For those aged 67 to 74, you no longer need to meet the work test to make non-concessional contributions, but this test may apply if you wish to claim a tax deduction for personal contributions.
Which Contribution Type is Right for You?
Choosing between concessional and non-concessional contributions largely depends on your current financial situation, tax position, and long-term retirement goals. Here’s how to decide which one may work best for you:
- If you’re looking to reduce your taxable income:
- Concessional contributions are an excellent way to reduce your taxable income, as these are made from pre-tax earnings and taxed at the lower 15% superannuation rate.
- If you’ve maxed out your concessional cap:
- Once you’ve reached the concessional cap of $30,000, you can still contribute more to your super via non-concessional contributions (up to $120,000 annually or more with the bring-forward rule).
- If you’ve received a lump sum or inheritance:
- Non-concessional contributions allow you to transfer large amounts into your super fund. This is useful for those wanting to boost their retirement savings with an after-tax windfall, such as an inheritance or sale of an asset.
- If you’re planning for the long term:
- Non-concessional contributions can significantly grow your superannuation balance over time due to the tax-free status of investment earnings in a superannuation account once you start drawing a pension.
Final Thoughts
Understanding the differences between concessional and non-concessional contributions allows you to make informed decisions about your superannuation strategy. Each type of contribution has its own set of rules, caps, and tax implications, and choosing the right mix can help you maximize your retirement savings while managing your tax liability.
Whether you’re looking to reduce your taxable income, make the most of a windfall, or simply grow your super balance, we recommend speaking with a financial advisor to ensure your contributions are optimized for your unique financial situation. With the right strategy in place, you can build a more secure and comfortable retirement.
If you have questions about superannuation contributions or need help navigating your retirement plan, contact our team of expert Financial Advisors today!
