Carry forward concessional contributions

Nervous about the amount of superannuation you have? Got some extra cash and are not sure where to invest it?

As you approach retirement, you’re probably looking at your superannuation to see if you will have enough when it comes to retirement.  

If you feel you won’t have enough for your retirement, perhaps, catch-up contributions and carry forward concessional contributions for your superannuation is the way to make up for any shortfalls in your retirement savings.

This blog will explain exactly how you can top up your super tax effectively. 

Overview:

• What are superannuation catch-up contributions?
• What are the benefits of catch-up contributions?
• What are the eligibility rules?
• What are carry forward concessional contributions?
• How carry-forward contributions work: 3 case studies
• Expiry of unused concessional contributions caps
• 5 steps to calculating your carry-forward amount
• Important things to consider when making carry forward contributions

What are superannuation catch-up contributions?

As you probably already know, there are limits to how much an individual can put into their superannuation each year.

The standard contribution limit is currently $27,500. This includes the amount your employer puts into your super account.

However, in Australia, if you are aged 50 or older, you can make additional contributions to your superannuation (retirement savings) accounts, above the standard contribution limit. 

These additional contributions are known as “catch-up contributions”. 

It means that you as an individual can ‘catch up’ on your retirement goals if you feel you have fallen behind.

The amount that can be contributed as catch-up contributions is dependent on the individual’s age and the amount of their total superannuation balance. It is also subject to contribution caps and tax rules. 

It’s best to consult with a financial advisor or check with the Australian Taxation Office for the most up-to-date information.

What are the benefits of catch-up contributions?

Still not sure if catch-up contributions are for you?

Consider these benefits of catch-up contributions in Australia:

1. They can help you build up your superannuation and reach your retirement goals superannuation if you have fallen behind on your retirement savings.

1. They provide an opportunity if you are older, to boost your retirement savings and potentially increase your retirement income.

1. Catch-up contributions allow you to take advantage of the many tax benefits associated with superannuation contributions, such as the tax concessions on contributions and investment earnings.

1. They provide an additional way for you to save for your retirement, in addition to other savings and investments.

1. They can help make sure you have enough savings to support yourself in retirement and potentially reduce your dependence on government support.

It’s best to consult with a financial advisor or check with the Australian Taxation Office for the most up-to-date information and to understand how this may fit into your overall retirement savings plan.

Before you jump right in and make some catch-up contributions, there are contribution caps and eligibility and tax rules that apply to these payments – we’ll discuss these, so please read on. 

What are the eligibility rules?

The eligibility rules for catch-up contributions in Australia are as follows:

• You must be age 50 or older at the end of the financial year in which the contributions are made.

• Your total superannuation balance must be less than the “general transfer balance cap”. This is currently $1.7 million, as of 2021.

• You must not have already reached your non-concessional contributions cap, which is $100,000 per year, or $300,000 over a three-year period under the bring-forward rule.

• You must not have already reached your concessional contributions cap, which is $27,500 per year (as of 2022-23), this includes the contributions that your employer makes on your behalf.

Check the latest rules and limits with the Australian Taxation Office as they are subject to change. It’s best to consult with a financial advisor to understand how catch-up contributions may fit into an overall retirement savings plan.

What are carry forward concessional contributions?

Carry forward concessional contributions in Australia refer to the ability of individuals to carry forward (into a new financial year) any unused portion of their annual concessional (before-tax) contributions cap for up to five financial years. 

So if you haven’t made any or haven’t utilised the yearly cap in super contributions in previous years, you can make larger contributions in a later year.

The annual cap for concessional contributions is currently $27,500 for all individuals. 

How carry-forward contributions work: 3 case studies

When it comes to superannuation and its complex tax rules it can get very confusing. 

Remember, carry forward contributions in Australia allow you to make additional contributions to their superannuation (retirement savings) accounts in future years, using the unused contribution cap space from previous years.

Here are three case studies to illustrate how carry forward concessional contributions work:

Case Study 1: 

John 

Age – 55 

Total superannuation balance – $500,000. 

Amount of non-concessional contributions for the last two years – 0. 

In the current financial year, John can use the unused contribution cap space from the last two years, which totals $200,000, to make additional non-concessional contributions. 

He can contribute up to $300,000 in total for the current financial year (because he is over 50), with $100,000 being the standard non-concessional contribution cap for that year.

Case Study 2: 

Jane 

Age – 47 

Total superannuation balance – $800,000. 

Amount of non-concessional contributions for the last year – 0. 

In the current financial year, Jane can use the unused contribution cap space from the last year, which totals $27,500, to make additional concessional contributions.

Jane can contribute up to $55,000 in total for the current financial year (2022-23), with $27,500 being the standard concessional contribution cap for the current year plus $27,500 from the last financial year.

Case Study 3: 

Michael 

Age – 40 

Total superannuation balance – $300,000. 

Amount of non-concessional contributions for the last three years – 0. 

In the current financial year, Michael can use the unused contribution cap space from the last three years, which totals $300,000, to make additional non-concessional contributions. 

He can contribute up to $600,000 in total for the current financial year, with $100,000 being the standard non-concessional contribution cap for that year.

Please note: these case studies are just examples and that the actual amount of contributions that can be made will vary depending on the individual’s situation, including their total superannuation balance and whether they have reached the non-concessional or concessional caps. 

Sleek always recommends you consult with a financial advisor or check with the Australian Taxation Office for the most up-to-date information and to understand how carry forward contributions may fit into an overall retirement savings plan.

Expiry of unused concessional contributions caps

In Australia, unused concessional contributions cap (the amount of pre-tax contributions that can be made) expires after five financial years. 

This means that if you do not use your full concessional contributions cap in a given financial year, you will only have five financial years to use that unused cap before it expires and cannot be carried forward.

For example, if you have only contributed $20,000 in the financial year 2020-2021, you will have a remaining $5,000 unused cap that you can carry forward and use in the next five financial years. 

If the individual does not use this remaining $5,000 before the end of the fifth financial year, it will expire and cannot be used.

Check with your financial advisor or the Australian Taxation Office for the most up-to-date information on the expiration of unused concessional contributions caps and how it may affect your retirement savings plan.

5 steps to calculating your carry-forward amount

If you are still a little confused, don’t worry, we understand this can be a hard concept to grasp. 

Here are five steps to help you work out your carry-forward amount for additional contributions:

Step 1 – Determine your unused concessional contributions cap for each financial year. 

Look at the amount of pre-tax contributions that you made in each financial year, and compare it to the standard concessional contributions cap for that year. You may need your superannuation statements to help you get these figures.

The difference between the two is your unused cap for that year.

Step 2 – Add up your unused caps for the last five financial years. 

Add up the unused caps for each of the last five financial years. This will give you a total unused cap amount that you can carry forward.

Step 3 – Check your total superannuation balance.

Make sure that your total superannuation balance is below the general transfer balance cap, which is currently $1.7 million, as of 2021.

Step 4 – Check your non-concessional contributions cap. 

Make sure that you have not reached your non-concessional contributions cap, which is $100,000 per year, or $300,000 over a three-year period under the bring-forward rule.

Step 5 – Calculate your carry forward amount.

Once you have determined your unused cap amount, add it to the current financial year’s concessional contributions cap. This will give you your total carry forward amount that you can contribute.

These steps are just a general guidance and the actual amount of contributions that can be made will vary depending on the individual’s situation, including their total superannuation balance and whether they have reached the non-concessional or concessional caps. 

Important things to consider when making carry forward contributions

When considering making carry-forward contributions in Australia, please consider these:

• Contribution caps and tax rules: make sure you understand the current contribution caps and tax rules that apply to superannuation contributions, including the general transfer balance cap, non-concessional contributions cap and the current concessional contributions cap.

• Your total superannuation balance: Remember, your total superannuation balance will affect how much you can contribute and whether you are eligible to make carry-forward contributions.

• Your retirement goals: Consider how carry forward contributions fit into your overall retirement savings plan and whether they will help you reach your retirement goals.

• Your other savings and investments: You also need to consider how carry forward contributions fit into your overall financial plan and whether they complement or conflict with your other savings and investments.

• The expiration of unused cap: Remember that unused caps will expire after five financial years, so it’s important to use them before they expire.

• The impact on your taxes: Carry forward contributions may have an impact on your taxes, so it is important to understand how this would affect you before making a contribution. Your accountant can help here.

• Seek professional advice: As mentioned before, it’s always best to consult with a financial advisor or check with the ATO to understand how carry forward contributions may fit into an overall retirement savings plan.

What next?

Speak with your financial advisor or accountant as they have an in-depth understanding of your whole financial situation. They will advise you on the best way to make carry forward contributions that align with your financial goals.

Don’t forget to communicate your intention with your super fund. This way they will be able to keep track of your contributions and make sure they don’t exceed the annual cap.

How can Sleek help? We have a team of accountants who are only too willing to help you go through your current financial situation and retirement goals to see if carry forward contributions are appropriate for you. Call now on +61 2 9100 0480 or make an appointment through our chat box.