How to dump $450,000 into your super in one year

Let’s say you sell an investment property and you have a significant sum of money to invest somewhere – can you dump the lot into super? There is a whole host of rules surrounding how much money you can dump into your super fund and many come under the bring-forward rule, which you should be acquainted with.

Now take note, today we’re only talking about contributing after-tax money into super, or as your financial planner calls it, non-concessional contributions. So don’t confuse this with the super guarantee contribution, salary sacrifice or other such contributions that involve your pre-tax income. Here we are only talking about contributions that you’ve already paid tax on; for instance, the after-tax proceeds of selling an investment property or other such investments; or the after-tax proceeds of an inheritance, for instance.

Now, as the rules stand for the 2010/2011 and 2011/2012 financial years, an individual can dump no more than $150,000 of after-tax money into super every financial year. This means that you can contribute $150,000 for financial year 1, another $150,000 for financial year 2 and a further $150,000 for the following financial year, making a grand total of $450,000 for the three years. However, if you are under age 65 you can “bring forward” up to two years’ worth of non-concessional contributions in year 1, meaning you can dump $450,000 in one shot representing three years worth of contributions.

We are talking about the individual here. Clearly, if you are a couple then you each have a contributions cap – meaning you can contribute up to $900,000 over a three-year period, or contribute the lot in one go. While only the fortunate have $900,000 lying around, it can be a handy strategy for inheritances, redundancy or insurance payouts.

It’s worth mentioning that you could accidentally trigger the bring-forward rule without being aware of it. Let’s say you contributed more than $150,000 in a financial year, for example $150,001 or $160,000. Due to this you automatically bring forward two years worth of contributions.

Let’s say you didn’t know this rule existed, and you contributed $160,000 in financial year 1, and $150,000 in the following two financial years – amounting to a total of $460,000 for the three years. As the three-year limit is $450,000, you’ve exceeded your contributions cap by $10,000. Unfortunately, the tax office penalises investors by clubbing them with penalty tax rates of 46.5%. Due to the ‘bring forward rules’ you were limited to contributing $290,000 for the remaining two years.

Instead, you could have contributed say $250,000 during the 2010/2011 financial year, and the remaining $200,000 over the course of the next two financial years, ending on 30 June 2013. By then if you are still under age 65, you could then dump a further $450,000 in year 4, which would be your quota for the following two years.

Why is this rule important? Well, it’s handy if you have a big lump sum that you’d like to contribute to a super fund; if you’re under age 65, you can dump the lot – a grand total of $450,000 – into super in one year. Bang. Remember, that this means you’re restricted from contributing any more until your three-year limit ends.

This rule is especially important for people just about to retire who do not intend to continue working past age 65. The ‘bring forward rule’ can be used as a last-minute dash into super before the gates close.

Remember that anyone 65 and over must be working at least part time to contribute money to super. You have to work at least 40 hours in 30 consecutive days in the financial year that you intend to contribute. But once a person hits age 75, they can no longer contribute to super.

So if you’re close to age 65 and about to hang up the working boots for good, can you dump $450,000 into super in a last dash effort to fill up your super coffer?

The bring-forward rules states that an individual age 63 or 64 can contribute up to $450,000 in a single financial year before reaching age 65. Even though the bring forward rules relates to the following two years when the person is age 65 and over, provided that the sum is contributed before age 65, then the individual does not have to prove that they are working. Indeed, this strategy is well worth checking out with your financial planner.

This does not mean, however, that a person age 64, can contribute $160,000 in financial year 1 and the remaining $290,000 the following financial years. The bring-forward rule only relates to the period of time when the individual is under age 65. The individual must be under age 65 on 1 July of that financial year to take advantage of the bring-forward rule for that financial year.

So what happens if you were age 64 on 1 July, but turn age 65 during that financial year? This gets tricky so listen up: since you can use the bring-forward rule as you were under age 65 at the start of the financial year, you can contribute as much as $450,000 for that financial year, but not in one go. Once you turn age 65 you can contribute no more than $150,000 in a single transaction. You must also satisfy the work test (ie. you must work at least 40 hours over a 30-day period in the financial year in which you make the contribution). You could, say, make three separate payments of $150,000 over that financial year – to the grand total of $450,000. Or alternatively, you can make a number of smaller contributions, ensuring that you do not exceed $450,000 for the entire year.

And yes, it’s complicated. But that’s super for you.