Is it a good idea to borrow money to invest into a superannuation fund?
The short answer is: rarely.
Just to be clear, this article is not about borrowing within a self managed super fund. That’s a subject for another day.
First things first — the risks
Superannuation funds invest in risky assets like shares and bonds. You run the risk that those investments fall in value, but of course your debt does not.
If you can easily service the loan, and you have a well managed superannuation portfolio, and a long term view, and nerves of steel, and your lender cannot force you to sell, then you may be able to ignore short term fluctuations and ultimately do well.
Other problems #1 — accessing the investment
Unless you are close to retirement, you can’t easily access your super fund investments.
That means your investment’s earnings can’t help you to service the loan.
It also means that if your circumstances change, you will not be able to sell your investment asset to repay the loan principal.
This is different to a home loan situation. If you borrow to invest in your home (or an investment asset), and you lose your job, you can sell the property and repay the debt.
Other Problems #2 — tax
If you borrow money and then invest it into your superannuation fund, then you will receive a tax deduction for your contribution, up to the concession limit, and your super fund will only pay tax at 15% on the contribution. (This limit is $25,000 per year if you are under 50 years of age, or $50,000 per year if you are over 50.) All good, so far.
The problem is, your interest repayments will not be tax deductable. The tax office does not regard borrowing to contribute to superannuation as debt ‘incurred in order to derive income’.
When might it be worth borrowing to make a super contribution?
If you are close to retirement and face a large tax bill, it may be worthwhile to contribute up to the concessional limit. This could mean effectively paying tax at 15% instead of the top marginal rate of 47%.
This could be useful if your income is high, or if you are selling an investment property and paying capital gains tax.
In any case, if you are contemplating any sort of borrowing to invest strategy, We strongly advice you to seek professional advice.
The Exception?
This is one to think about before 30 June. If you need to borrow to contribute $1,000 to invest in your superannuation, in order to receive the $500 Government co-contribution(and you’re confident you can pay the loan off quickly) it may be worth considering.
What are your thoughts?
Are you thinking of borrowing to invest in super, perhaps in order to access the co-contribution? Is there anything else you’d like to know about geared investing or superannuation?
Join the conversation — leave a comment below and let us know what you’re thoughts are.