If you’re a business owner, a parent or grandparent, a pre-retiree, you may have already heard about investing in an investment bond. This article will share some of the benefits of investing your money in an investment bond and how it may be well-suited to your future financial goals.
If you haven’t heard much about investment bonds and need a refresh on what they are, check out our article: Investment Bonds Part 1: What is an investment bond and how does it work?
The tax benefits of an investment bond are simple; it is essentially a ‘tax paid’ investment, meaning the tax on your investment earnings is paid by the bond issuer, and the bond owner (you) doesn’t have to pay any personal tax on top.
The earnings are internally taxed at a maximum of 30%. If you pay much more than 30% personal income tax, an investment bond is considered a fantastic tax advantage since your marginal tax rate is higher than 30%.
However, if your marginal tax rate is lower than 30%, it may be beneficial to seek financial advice to ensure this investment option is suited to your needs.
You can take advantage of the maximum tax benefit of investment bonds by leaving your investment in the bond for a minimum of 10 years. If you don’t withdraw your money within the investment bond before 10 years, you won’t have to pay extra on the capital gains earned after 10 years.
However, if you make a withdrawal during the first ten years, some (or all) of the profit you earn may be taxed at your tax rate, in addition to the tax paid inside the bond.
You will receive a 30% tax offset to decrease the tax you must pay. Keep in mind that if the amount you contribute to the investment bond in a given year exceeds 125% of what you contributed the previous year, the 10-year term will be reset.
You may choose to use your investment bond as a tax-efficient savings plan for your children or grandchildren. Similar to a managed fund, you can establish either a one-off contribution or make regular ongoing contributions.
Investment bonds let you invest on behalf of a child or grandchild and then transfer the investment ownership to that person on a date you choose (ie. their 18th birthday).
This feature of investment bonds allows parents and grandparents to tax-effectively save for big-ticket items for their kids and grandchildren – such as a house deposit.
An investment bond can also be easily transferred to another recipient of your choosing, without triggering any tax implications.
You may even want to seek personal financial advice from an experienced wealth creation adviser and assess whether this could be included in your financial plan.
An investment bond can be considered a useful estate planning tool as it can assist your plans of distributing your estate. Effectively, your investment bond can complement your Will to ensure a smooth transition of your wealth to your loved ones.
An investment bond allows you to leave a lump sum (investment bond earnings) to your nominated beneficiaries in the event of your death, tax-free, without delay on a date that you choose and without the concern of your wishes being contested.
If you have reached your superannuation contribution caps but have additional money that you’d like to save for your retirement or future, you can use an investment bond to tax-effectively do so.
Investment bonds have the unique advantage of offering a lower tax rate than most investment options, outside of your super. However, unlike your super, an investment bond has no limits on how much or how often you can contribute (as long as you meet the 125% Contribution Rule – see Part 1 for more details).
Also, you don’t have to wait till you reach your preservation age to access your funds like your super, you have the flexibility to withdraw your funds at any time.
At Poole Advisory, we offer a range of investment advisory services and wealth creation solutions to help you achieve financial freedom.
Whether you’re an experienced investor looking to grow your wealth or a novice who is interested in taking the first steps towards creating a successful investment portfolio, our experienced wealth advice team and investment advisors can support you.
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This information contains general advice only, that is, advice which does not take into account your needs, objectives, or financial situation. You need to consider the appropriateness of that general advice in light of your personal circumstances before acting on the advice. You should obtain and consider the Product Disclosure Statement for any product discussed before making a decision to acquire that product. You should obtain financial or credit advice that addresses your specific needs and situation before making investment or borrowing decisions. Taxation information is based on our interpretation of the relevant laws as at 1 July 2018. While every care has been taken in the preparation of this information, Prosperitas Partners Pty Ltd does not guarantee the accuracy or completeness of the information. The case studies are hypothetical, for illustration purposes only and are not based on actual returns
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