Now that we're in June, you may be thinking about the best way to maximise your wealth this financial year.
This may involve making a voluntary superannuation contribution.
With the end of the financial year just weeks away, now is the time to make this decision if you want to claim it in your FY25 tax return.
Another option is to buy shares in your brokerage account.
Which could be the better decision for you? Let's explore.
Why make a voluntary contribution?
A voluntary superannuation contribution is additional money that's added to your super account. This is distinct from the Super Guarantee (SG) contributions made by your employer.
The funds may come from your salary, savings, an inheritance, or the proceeds from the sale of an asset.
Once made, you are able to claim a tax deduction in the year that it is contributed. This is especially appealing to higher-income earners, who pay a higher marginal tax rate.
Voluntary contributions are taxed at just 15% in your super fund.
However, there is a limit on the amount that can be contributed each financial year.
For the FY25 financial year, a maximum of $30,000 can be added to super. This includes both employer contributions and voluntary superannuation contributions. Employers are now required to pay 11.5% of your pay into your super. You can contribute the gap between this amount and $30,000.
For example, let's say you make $100,000 a year. Your employer has contributed $11,500 throughout the year. This means you can contribute up to $18,500 in FY25.
You are also entitled to use up any unused contributions for the past 5 years.
This can be advantageous if you've made a large capital gain this financial year. For example, if you are selling Pro Medicus Ltd (ASX: PME), Life360 (ASX: 360), or TechnologyOne Ltd (ASX: TNE) shares that are up more than 100% in a year.
It's especially useful if you're realising large capital gains on shares that you've held for less than 12 months. Shares held for less than 12 months are not entitled to a 50% capital gains discount, meaning you'll pay significantly more tax on these investments.
For example, if you bought Pro Medicus in the April dip, you've already made a 60% capital gain. Or, if you bought Life360 a month ago, you're already up 45%.
If you're looking to sell these investments before the end of the financial year, you can contribute the proceeds to your super to save on tax.
Should I buy shares instead?
Of course, contributing spare cash to your super isn't the only way to grow your wealth.
You can continue to build your share portfolio.
While you don't get the tax benefit, there are a couple of major advantages to this strategy.
Firstly, unlike your industry super fund, you have ultimate flexibility on where your spare $5,000 is invested. If you pick the right investments, this could result in a higher net worth down the road.
Secondly, you have the flexibility of withdrawing these funds whenever you like. Once you've contributed your money to super, you can't access it (except in limited circumstances) until at least the age of 60. That flexibility could be invaluable as an emergency fund, should you lose your job, need to cover medical bills, or put it towards a house deposit down the road.
Foolish Takeaway
With the end of the financial year rapidly approaching, you may be wondering how to best allocate spare cash to maximise your wealth. Two options are to make a voluntary superannuation contribution to super or to buy shares. Each has clear advantages. Of course, you don't have to pick between the two strategies. A third option is to split your funds between these two options and enjoy the best of both worlds.
