How to use your superannuation to become a millionaire

Superannuation has gotten a lot of publicity lately. On one hand, super balances around the country were subjected to some pretty nasty volatility earlier in the year when the first wave of fear over the coronavirus gripped the markets. Since the S&P/ASX 200 Index (ASX: XJO) fell over 38% peak-to-trough in March, most Australians would have seen the value of their super balance fall quite far in all likelihood.

On the other hand, the government has allowed some individuals to withdraw up to $10,000 from their super accounts in this financial year to assist with hardship because of the coronavirus. Another $10,000 is permitted in FY21 (starting in July).

Despite these issues, superannuation still has a powerful potential to help you build long-term wealth – a potential that is too often ignored.

So where does this potential come from? Well, it’s the nature of the super system itself.

The advantages of super

Superannuation isn’t a ‘form of investment’ or an ‘asset class’, as is often misconstrued. It’s merely a vehicle that can hold other assets (like ASX shares) within it.

But unlike investing outside your super fund, the rules over tax are very advantageous if you invest through super.

For one, contributions are typically only taxed at 15% on entry – as opposed to other income which is taxed at your full marginal rate. All earnings that the assets within your fund generate (e.g. dividends and interest) are also taxed at 15%.

As such, super can be viewed as something of a tax shelter.

Now, normally, all Australian employers are required to pay 9.5% of each employee’s salary into super. This level is the bare minimum most employees will receive, but you can also contribute on top of this base with salary sacrificing.

Salary sacrificing is also done with pre-tax dollars (up to a cap), so you will also be paying less tax on this money. Of course, the downside is that you can’t touch the money until retirement.

How superannuation can make you a millionaire

By using this vehicle effectively and over a long period of time, you can significantly boost your wealth and prospects of a comfortable retirement. Compound interest works best when it’s left alone and works even better in a tax-sheltered environment like super.

So if you aren’t already, it might be a good idea to take full advantage of our super system. There are many perks like salary sacrificing to invest within super that investors ignore to their detriment. Don’t be that guy – make sure your super is working as well as it can for you today!

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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