Should You Put Your Inheritance into Super?

Receiving an inheritance can provide an unexpected financial boost, opening up possibilities for enhancing your future. One smart way to maximise the impact of your inheritance is by contributing it to your superannuation. But is this move the best option for you? Below, we’ll explore the advantages and limitations of putting your inheritance into your super to help you make an informed decision.

Benefits of contributing your inheritance into super

Tax benefits

Super contributions, particularly voluntary ones, come with significant tax advantages. When you contribute funds into your super as before -tax (or concessional) contributions, they are generally taxed at a concessional rate of 15%, which is often lower than the marginal tax rate for most Australians. Super earnings are generally also only taxed at 15%. This difference means you could potentially save a substantial amount on taxes compared to leaving your inheritance in a regular savings or investment account.

Increased retirement savings

If you're nearing retirement, adding a portion or all of your inheritance to your super can significantly boost your balance. This can offer greater financial security and flexibility once you stop working. The power of compound interest further enhances your savings over time, making every dollar added today worth much more in the future.

Simplifies your investment management

If investing isn’t your forte, putting your inheritance into your super can simplify wealth management. Super funds are run by experienced financial professionals and typically offer a diversified mix of investment options to grow your money steadily. This hands-off approach can be especially attractive if you’d rather avoid the hassle of navigating the share market or other complex investment choices yourself.

Takeaway: Relying on your super fund for investment management can save you time and reduce stress, especially if financial planning isn’t your area of expertise.

Limitations of contributing your inheritance into super

Restricted access until preservation age

One significant limitation of putting your inheritance into your super is that you won’t be able to access those funds until you reach preservation age. For most Australians, this age depending on when you were born. From 1 July 2024 it will be age 60 for everyone. If you think you may need the funds in the short to medium term, this lack of accessibility could be a disadvantage.

Contribution caps

It’s essential to know that super contributions come with annual caps. Exceeding these caps can lead to excess contribution taxes, eating into the benefits you might otherwise gain.

Important Note: You can leverage the bring-forward rule, which allows you to contribute up to three times the annual non-concessional (after tax) cap in a single financial year if you’re under age 75 and have a total super balance below the transfer balance cap ($1.9 million for the 2024-25 financial year)at the end of the 30 June of the previous financial year.

Opportunity cost of other investments

Although contributing to super offers multiple benefits, it might not always align with your overall financial strategy. There could be other investments available, such as property, shares, or even paying down high-interest debt, that could provide more immediate or flexible returns compared to superannuation.

Consideration: Evaluate your financial goals and needs. If you’re in a phase of life where liquidity or other investments are more crucial, it may be worth diversifying instead of locking funds into super.

Key takeaways: Should you contribute your inheritance into super?

Putting your inheritance into super can be a strategic move, especially if your goals include long-term financial growth, tax benefits, and a secure retirement. However, it comes with its set of challenges, including contribution limits and reduced access until you reach preservation age. To make the best decision:

• Evaluate your financial needs for both the short and long term.
• Understand contribution caps and seek advice to avoid tax penalties.
• Consider your comfort level with other investment types versus a hands-off approach with your super.

Deciding to contribute your inheritance into super can be an excellent way to secure your financial future and take advantage of tax benefits. However, understanding the limitations and ensuring it fits your overall financial plan is key. It is recommended to seek financial advice to navigate your options confidentiality.