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.