Everything You Need to Know About Concessional Contributions

Are you interested in boosting your retirement savings in a tax-effective way? If so, concessional contributions could be a great option for you. What is a concessional contributions? A concessional contribution is an amount of money that can be contributed to your superannuation account before paying taxes. In this blog post, we’ll take a closer look at concessional contributions, what they are, how they work, and the benefits of making them.

Sources of concessional contributions

Concessional contributions can come from three main sources: employer contributions, salary sacrifices, and personal contributions that are claimed as a tax deduction. Employer contributions are the most common type of concessional contribution. They are contributions made by your employer on your behalf and count towards your concessional contributions cap. Salary sacrifice is another type of concessional contribution where you agree to sacrifice a portion of your pre-tax salary into superannuation. Personal contributions that are claimed as a tax deduction are also considered concessional.

The concessional contributions cap for the financial year is currently $27,500. Any contributions made above this amount will be taxed at your marginal tax rate. It’s important to note that concessional contributions are subject to a 15% contribution tax upon entering your super fund. However, this tax is generally lower than most individual’s marginal tax rates.

The concessional contributions cap is determined by your age. If you are under 67 years old, you do not need to satisfy the work test to make concessional contributions. If you are 67-74 years old, you need to meet the work test to make concessional contributions. The work test requires you to work at least 40 hours over a 30 consecutive day period in the financial year that you intend to make your contribution. If you are aged 75 or over, you are not eligible to make concessional contributions.

Benefits of making concessional contributions

One of the main benefits of making concessional contributions is reducing your taxable income. By contributing pre-tax income to your super fund, you are reducing the amount of income taxed at your marginal tax rate. This can lead to considerable tax savings. In addition, concessional contributions can boost your retirement savings in a tax-effective way. Since the contributions are taxed at a lower rate when they enter your super fund, your savings grow faster than they would outside of super.

Unused concessional contributions can be carried forward for up to five years. This means that if you don’t contribute the full $27,500 in one year, you can use the remaining balance in the following years. This is especially useful when you have a windfall or receive a bonus as you can use these funds to boost your super savings.

In summary, concessional contributions are a great way to boost your retirement savings in a tax-effective manner. By understanding how they work and considering your eligibility, you can take advantage of concessional contributions and reduce your taxable income while saving for your future. Remember to keep the concessional contributions cap in mind and utilize any unused balances, especially if you receive any sudden income windfalls. By making concessional contributions a part of your superannuation strategy, you can enjoy the benefits of tax-efficient saving and compound interest for many years to come.