$50k - Deposit into Super or Reduce Mortgage

TheMindsetTraveller on 06/09/2021 - 16:02

What would you do? or what is better?

Assume the following:

40 years old person, earns $68k per year. Has a mortgage on the family home of $300k with an interest rate of 2.0% pa. The person is allowed to salary sacrifice $50k and does not need the money and understands any contribution is not accessible until 65+ years of age.

These are my thoughts, happy to be corrected:

Sacrificing $50k to super drops the taxable income to $18k, which is now tax-free. This saves around $12,600 in personal taxes. However, the $50k super contribution attracts a 15% tax = $7,500. So the immediate cash benefits are around $5,100.

Let us assume that 50k at super can grow around 8-10% per year conservatively and that house prices may grow at similar rates.

What would you do?

Poll Options expired

  • 16
    Deposit into Superannuation
  • 64
    Reduce Mortgage (primary residence)
Financial Home Loan Loan Superannuation

Comments

  • MrHyde on 06/09/2021 - 16:07

    Mortgage is considered bad debt (not tax deductible). I would pay off all bad debt first.

    • Mechz on 06/09/2021 - 16:51
      +1

      At 2% it's really not that bad. Stacked against property value increases year on year it's free money.

  • jjjaar on 06/09/2021 - 16:11
    +3

    Mortgage for sure. Especially if you have offset or redraw. It’s good to say you don’t need the money but you never know when having access to that 50k might come in handy.

  • Bafranz on 06/09/2021 - 16:12

    Mortgage unless balloon payment triggered

  • garetz on 06/09/2021 - 16:21

    If you have an offset account, put it in there. Sooner or later interest rates will rise and you will regret losing access to the 50k. Liquidity is very important and losing access to that money might bite you in the ass sooner or later.

    Instead of putting the entire 50k in super, consider putting in less that will reduce your taxable income enough to lower your tax bracket. That is the most effective use of paying more into your super.

  • Baysew on 06/09/2021 - 16:27
    +7

    $25k in each.

    • TheMindsetTraveller on 06/09/2021 - 23:10

      Looking to maximise the benefits, so will split whatever way works best? Thanks for the reply!

      • Jackson on 09/03/2022 - 10:59

        TMK 25k is the maximum additional voluntary contribution to super each year, so the second 25k in the 50 would just be taxed at the going rate

  • Porker on 06/09/2021 - 16:28
    +2

    Normally, I'd say reduce mortgage debt…. but…. with Covid and the crash of stocks etc encouraged me to look into my super more and I adjusted the investments.

    I'm avoiding giving out actually dollar amounts, but my fund's growth last month (August 2021) was triple the entire year's growth for 2019 and earlier (for me). I was very late to the super game (adjustment) and only did so at the start of this calendar year, but in that 9 months my fund grew by more than the 3 years (combined) prior to 2019.

    So I wouldn't rule out super contribution to capitalise on the market right now. But at the same time, as others have said, having $50k in an offset is a handy situation to be in too.

    There would be many considerations too, eg. how quickly the mortgage can be paid off, kids/family, other financial commitments etc.

    I provide the above having already paid off my house.

    • JimmyF on 06/09/2021 - 18:42
      +1

      Normally, I'd say reduce mortgage debt…. but…. with Covid and the crash of stocks etc encouraged me to look into my super more and I adjusted the investments.

      Covid crash has come and gone, stock market is at record highs…..

    • TheMindsetTraveller on 06/09/2021 - 23:08

      Yeah thanks, your points gave me some good thoughts.

      There are many considerations that I will sit down and really assess in the next few days.

    • jv on 06/09/2021 - 23:23

      and the crash of stocks

      what crash ?

  • screensaver on 06/09/2021 - 16:45
    +1

    half in each

  • blueyez on 06/09/2021 - 16:51

    A lot of people always seem to think paying off their mortgage is a better choice, I would argue putting it into super gives a better return. Would suggest speaking with a financial advisor to make an informed decision.

  • Shadowsfury on 06/09/2021 - 16:58
    +4

    Put into super enough to drop taxable income to $45k (i.e. bottom of 32.5c bracket)

    Put rest into mortgage.

    That way you avoid the diminishing returns from going below this which will be 15c super tax vs only 19c income tax. With only 4c save I'd rather keep flexibility of the money.

    Next year maybe could consider doing the same.

    • TheMindsetTraveller on 06/09/2021 - 23:17

      Yeah, going to 2nd lowest tax bracket is another option, it's just super is going bonkers at the moment (and while this is not guaranteed moving forward), I wouldn't mind putting the bulk of my income there (assume I am under the carry forward concessional caps). Regarding flexibility, that is also another consideration (for me, not worried about liquidity risks, but that any cash locked up in super equals inability to use those funds to purchase future property investments unless I create an SMSF)

  • freefall101 on 06/09/2021 - 17:01
    +5

    Double check the concessional cap before adding to super, it's only $27,500 per year (however unused amounts from prior years roll forward for up to 5 years).

    • robbyjones on 06/09/2021 - 18:47
      +1

      Bear in mind this $27500 includes your company's contribution.

      • jv on 06/09/2021 - 23:25
        -1

        Bear in mind

        what?

  • tio on 06/09/2021 - 17:20
    +1

    I vote for super. Also, you can access super at 60.

    https://www.ato.gov.au/Rates/Key-superannuation-rates-and-th…

  • JimmyF on 06/09/2021 - 18:42

    The person is allowed to salary sacrifice $50k

    Errr I think you'll find the super cap is a lot lower than that.

  • mickyb80 on 06/09/2021 - 18:55

    Why not split the spend?

  • rektrading on 06/09/2021 - 19:35

    A 2% APR is nothing. The central banks won't raise the rates without tanking the economy.

    So put all of it in high-risk, high capital gain assets. Whatever the fund can do in 25Y will 2x in the same time in high capital gain assets.

    “A bird in the hand is worth two in the bush,”

  • Donaldhump on 06/09/2021 - 19:52

    Your house growth rate is negligible to the question at hand, it will grow whether or not you sacrifice.

    If you think super will grow at 8 percent, invest the money the same way external, but as other suggest sacrifice to the top of the 19% tax bracket and offset/invest the rest.

    Also how much other buffer do you have? Wage income is not garunteed so I’d want 50k in reserves.

    • TheMindsetTraveller on 06/09/2021 - 23:24

      I am just conservatively estimating super growth at 8-10%. The last 12m have gone up much more than that.

      Yeah, will have reserves, but importantly the other half works :D

      • Donaldhump on 07/09/2021 - 12:42

        conservative? conservative would be 4%
        the last 12 months isnt normal

  • DarkOz on 06/09/2021 - 20:11

    I would go for Super simply because the interest rate is the lowest on record. But there is a limit isn't there? How about 50-50? It doesn't have to be one-sided.

  • Lunarboogie on 06/09/2021 - 22:47

    I'd be putting the cash into where it works the hardest.

    If super earns you 8 per cent and the interest rate on the mortgage is 2 per cent, than that says it all young padawan.

  • ozbargainerlife1 on 06/09/2021 - 23:20

    look into personal concessional contribution to super. super pays 15% tax you claim 15% back in personal tax

  • TheMindsetTraveller on 06/09/2021 - 23:26

    Thank you for all the replies so far. There is definitely lots to think about it, especially to make informed decisions to see what might be the best choice.

  • Jetkuma on 06/09/2021 - 23:48
    +2

    Since this is the internet of things, I’ll just leave this here:

    Salary: $68,000
    Marginal Tax Rate: 32.5%
    Approximate Income Tax Payable: $12,567
    Medicare Levy Payable: $1,360
    Tax Home Pay: $54,073

    SGC: Based on 10% - $6,800
    Concessional Cap: $27,500 for 2021-22
    Remaining Cap for 2021/22 = $20,700

    After contribution:
    Salary: $68,000
    Less Salary Sacrifice: $20,700
    Salary after contribution: $47,300
    Less income tax payable: -$5,839
    Less Medicare Levy: -$946
    Tax Home Pay: $40,515

    Net gain in tax: $7,142

    Super ($ pa)
    No contribution:
    SGC: $6,800
    Less contribution tax: -$1,020
    Net contribution: $5,780

    With contributions:
    SGC: $6,800
    SS: $20,700
    Less contribution tax: -$4,125
    Net contribution: $23,375

    You cannot contribute more than $20,700 into super. The only way you can contribute $50,000 into super is via catch up concessional contribution (pulling your previous 2 years concessional contribution). I don’t know your past 3 years concessional contribution to decide. However, I wouldn’t really contribute more to push your gross salary down below $45,000 as you are only saving 0.04 per $1 dollar contributed. It isn’t worth it to trade for liquidity.

    You could always put $50,000 in your offset account till June. Contribute $20,700 in June. Then next financial year you can contribute another $20,700 (if the contribution cap stays the same).

    There is that strategy where you invest now. Put $29,300 into the offset account. Then next financial year put in another $20,700.

    Well, you can also consider: dollar-cost averaging. $5,000 now, $5,000 Jan , $5,000 in March, and $5,700 in June. You are spreading out your risks.

    In addition, there is no such thing as a gain of 8% year on year. That’s just misinformation. The stock market average is about 10% per year. That’s AVERAGE. Please look at 2008: ~-20%, 2020: ~-37%, and 2000: ~77% drop. Now you need to think that you will not tinker with your super portfolio when it crashes drops 50% when you are 50 and it might not recover till 2-5 years. Can you handle that? That’s the biggest question you will need to answer yourself.

    TLDR: Go speak to a financial adviser and don't listen to a bunch of random on the internet.

    Sources: I used moneysmart.gov.au and ATO - income taxable to piece this information for you.

    • TheMindsetTraveller on 07/09/2021 - 08:22

      There can be some valid and helpful comments even from a bunch of randoms, but it is part of the learning - rightly or wrongly - that we all do. Many of us use Dr. Google before going to see the real doctor, but we never learn ;)

      In any case, happy to use your figures above that show a $7,142 net gain from income tax, but then is offset by an increase of contribution tax of $3,105. Thus, one is better off by $4,037 at that point. Given that it is a $20,700 decision, one could say you have already gained 19.5% immediately, in exchange for super funds subject to risk, liquidity, and locking up those funds for, say, 25 years.

      Thanks for the input.

  • Rako on 07/09/2021 - 13:42

    Reducing the mortgage will always be the safest option makes sleeping at night easier!

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