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$1.5 million pay day using simple $10 trick: 'Worth your attention'

Finance expert Ben Nash details how to avoid tax and build your retirement nest egg with these super tricks.

Ben Nash in a white t-shirt and glasses set on top of $100 notes.
Ben Nash details how you can use your superannuation to avoid tax. (Getty/Supplied)

If you’re thinking about how to cut your tax bill, superannuation probably isn’t the first thing that comes to mind. This is particularly true if you have a long time until retirement.

Super is often something that seems like a ‘tomorrow’ issue. But the reality is that superannuation comes with some seriously profitable opportunities.

For example, a 20-year-old today with an income of $60,000 who makes extra super contributions of just $10 daily will see their super fund grow by an extra $1,526,429 by age 65.

And to top it off, making even only small contributions like this will save you tax of $141,592 over this timeframe - and even more if your income and tax rate are higher.

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Super is worth your attention. And the best part, it doesn’t even cost you $10 to get $10 into your super fund…

There are two ways you can add money to your superannuation fund, being ‘concessional contributions’ and ‘non-concessional contributions’.

Non-concessional contributions are made to super with after-tax money.

There are no tax deductions on offer, so this strategy is only really for people with significant excess savings. But concessional contributions are an entirely different story.

Concessional contributions are fully tax-deductible.

There is an annual limit of $27,500 for this type of super contribution, which is increasing to $30,000 from July 1 (check out all the money changes coming in the new financial year here).

It’s worth noting this limit includes any compulsory contributions made to your super fund by your employer under the superannuation guarantee rules.

But for most people, the concessional contribution limit leaves a lot of room for getting quite a lot of money into your super fund - and can give you some big tax deductions in the process.

Any concessional contributions you make to your super fund are tax-deductible to you personally at your marginal tax rate.

BREAK IT DOWN: In Australia, if your income is above $45,000, your marginal tax rate + medicare levy is at least 34.5 per cent (reducing to 32 per cent from July 1).

This means making concessional super contributions of $10,000 would reduce your tax by $3,450.

If you do the math, that means it actually only costs you $6,550 to make a $10,000 contribution to your super fund.

There is no other way to invest in Australia that gives you as many tax deductions as what’s on offer with your super fund.

Once you get money into your super fund there are even more tax benefits, because the tax rate inside your super fund is a maximum of 15 per cent, and only 10 per cent on gains on investments held for longer than 12 months.

This is much lower than personal marginal tax rates of up to 47 per cent that apply to investment income.

And it gets even better.

Once you hit age 60 and start a super pension, there is no tax payable on the earnings of the first $1.9 million in investments you have in super.

AND, when you take an income from this super pension the income isn’t taxed at all.

Your super, in effect, becomes like a tax-free investment account.

BREAK IT DOWN: Consider this example. If you wanted to build up investments to give you an after-tax income of $100,000 each year, you would need to have investments valued at around $2 million.

This is based on the ‘5 per cent rule’, which says if you have a pool of investments you can generate an investment income of around 5 per cent each year without eating into your capital savings.

If you had this money invested through superannuation and were in the pension phase, your tax would be close to zero, meaning you’d only need the $2 million in investments.

If instead, you were to own these investments in your personal name, you’d be paying tax on your investment income at personal marginal tax rates.

In this case, you’d need to earn an income of around $140,000, pay income tax of around $40,000 p.a., to then be left with an after-tax income of around $100,000.

Using the 5 per cent rule, you’d need around $2.8 million in total investments to generate $140,000 of before tax investment income, and then be left with the $100,000 after tax income.

In this example, by investing through superannuation you need to save $800,000 less to get to hit your financial target.

If you want to achieve financial security in the shortest possible time frame, leveraging your super fund to its maximum potential can be a powerful accelerator.

Superannuation isn’t the most exciting place to invest money.

But in my opinion, if you want excitement - take up a new hobby.

If you want to make money, focus on the things you can do to use the rules to your advantage, and superannuation should be at least part of the picture.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth www.pivotwealth.com.au, and Author of the Amazon Best Selling Book ‘Get Unstuck: Your guide to creating a life not limited by money’. www.getunstuckbook.com.au

Ben has just launched a series of free online money education events to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.