Is investing in super a smart move right now?

Investing in super can generate long-term wealth, but it's not for everyone. Here's some things to consider before locking your money away.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investing some extra money in super can have real advantages if you're looking to build long-term wealth.

Superannuation could mean being a member of an industry fund, a for-profit fund or even running a self-managed super fund (SMSF).

But the basics of super remain the same across all vehicles. Investing in super over and above the 9.5% Superannuation Guarantee from your employer may not be the right decision for everyone. It's a big decision which will ultimately depend on investment goals, age and income level.

So, how do you know what's the best way to invest for you?

The benefits of investing in ASX shares

Many pre-set options in super funds won't allow you to choose your investments as you could outside of super.

For instance, unless you've got an SMSF, you probably can't buy individual ASX shares. That means you may have to leave buying growth shares like Xero Limited (ASX: XRO) for your investment accounts outside of your super fund.

The flexibility that can provide could be a real benefit for an active investor. While investing in super can provide some powerful long-term benefits, many Aussies may not want to lock-up that money until retirement.

For instance, a lot of younger investors may have one eye on buying property. The First Home Super Saver (FHSS) allows you to access up to $30,000 from your super for a deposit. But then many investors may prefer to just avoid the hassle in the first place.

So while it's true that compounding returns are boosted inside your super fund, investing more than just the 9.5% from your employer won't suit everyone's goals and needs.

Why should you be investing in super?

The big factor here is tax. It's a good time to look at investing in super considering we're fast headed towards 30 June and the end of the financial year.

Provided the eligibility criteria is met, concessional superannuation contributions are taxed at just 15% inside of super.

For most Australians, that means you can use super to reduce your tax bill at the end of the year, while still boosting your retirement income. Every dollar earned above $18,200 per year is subject to at least 19 cents of tax.

That means that even in the lowest tax bracket there are potential tax savings. However, if your income is above the $180,000 mark, the tax-advantaged status of super really starts to add up. 

Other than just investing for tax reasons, superannuation investments can offer a liquidity premium. Given the long-term horizon of super funds, they can invest in long-term investments like infrastructure and private equity.

These investments aren't easy to access for the average Aussie investor. That means that you could invest in more than just ASX shares if you're investing in super. 

This could mean higher returns (due to the liquidity premium on investments) as well as strong diversification options for your portfolio.

Foolish takeaway

Super is a complicated but powerful tool for retirement. As always, it's best to talk to a financial advisor to determine what's best for your individual circumstances.

While the potential tax benefits are clear, investing extra money in super can tie your cash up for a long time which won't suit everyone's needs.

Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Tax

Cubes with tax written on them on top of Australian dollar notes.
Tax

How much tax do your ASX shares pay? Why it might matter

Taxes. One of the two unavoidables in life.

Read more »

Elderly couple look sideways at each other in mild disagreement
Retirement

How would the proposed unrealised gains tax impact your superannuation?

If passed, the impacts could be profound for those with higher-end super balances.

Read more »

Tax time written on wooden blocks next to a calculator and Australian dollar notes.
Tax

Don't forget your franking credits this tax time

Franking credits form an important part of your returns from your dividend shares.

Read more »

Tax time written on wooden blocks next to a calculator and Australian dollar notes.
Tax

Own ASX shares? Here are 3 investing tax deductions you may not be aware of

Make sure you don't miss out on any of the tax breaks available to owners of ASX shares this tax…

Read more »

A golfer celebrates a good shot at the tee, indicating success.
Tax

Tax time: If you have ASX shares, here's what you need to know about franking credits

Franking credits are vital to your returns from ASX shares.

Read more »

A woman in a hammock on her laptop and drinking a smoothie
Tax

How to turn your stage 3 tax cuts into $11,396 buying ASX 200 shares

Do you plan to invest your stage three tax cuts in ASX shares?

Read more »

Man holding a calculator with Australian dollar notes, symbolising dividends.
Tax

How is passive income taxed in Australia?

When it comes to passive income, the ATO is very clear.

Read more »

A man sits at his home desk calculating tax on a calculator.
Dividend Investing

Tax-busters: 5 fully-franked ASX dividend shares I'd buy for FY24

Fully-franked dividends can give you income while helping you pay less tax.

Read more »