A contributions holiday shouldn't stop you putting $1043 a year into KiwiSaver
KEY POINTS:
Q. I am contributing 4 per cent of my income to a KiwiSaver account but plan to take a contributions holiday from October when I've been in KiwiSaver for a year as my mortgage is crippling and rising (and I earn over $100,000 a year).
After that, I
will make voluntary contributions of $1043 a year. I understand the Government will match that with another $1043, and if my employer is fond of me and I ask nicely, they might also contribute $1043? Totalling $3129 a year. Can this be true?
A. Indeed it is. And I can suggest something even better than that. But let's take this one step at a time.
Many people can immediately triple the money they put into KiwiSaver. And three times as much going in means three times as much earning returns over the years and three times as much coming out the other end.
Retirement savings that might otherwise have totalled $50,000 will total $150,000. If they might otherwise have totalled $500,000, they will total $1.5 million.
Other KiwiSavers will double their money. Some will quadruple it. It's all good stuff. That's why I keep raving about the scheme.
The situations for different people are:
* Most employees who earn $26,000 or less will always more than double their money - with the tax credit matching their contribution and the employer adding more. From April 2011 - when employer contributions reach the maximum 4 per cent - they will triple their money. And if they divert half their contributions via mortgage diversion they will quadruple their money. More on this last bit in a minute.
* Most employees on more than $26,000 will see their contributions boosted considerably - although for those on high incomes it won't be hugely at first. Still, from April 2011 pretty much all employees' money will be more than doubled. What's more, if they use mortgage diversion, their money will be more than tripled.
* People like you - employees who take a contributions holiday but keep putting in $1043 a year and have an obliging boss - will triple their money. While employers don't have to contribute to employees on contributions holidays, the Government will reimburse them up to $1043 a year if they do contribute. So it won't cost them anything - except administration costs.
* If the boss is not obliging, employees on contributions holidays who put in $1043 a year will double their money - from the matching tax credit.
* The exceptions are employees whose pay rises are reduced by the amount of their employers' KiwiSaver contributions, or whose employers are exempt from contributing to KiwiSaver because they are giving to the employees in a non-KiwiSaver scheme. Those employees' contributions are effectively boosted only by the tax credit. The impact of that varies according to their pay level.
* Non-employees who put in $1043 a year or less will have their contribution matched by the tax credit, so their money will be doubled.
So what's mortgage diversion? After you've been in KiwiSaver for a year, you can arrange to have up to half your contributions diverted into paying off the mortgage on your "principal residence" - in other words not a bach or rental property.
While most of the big banks say at this stage that they won't accept diverted money as part of your regular required mortgage payments, almost all will let you divert KiwiSaver money towards extra payments of your mortgage,
There's a downside to mortgage diversion for people earning less than $52,000. Their 4 per cent KiwiSaver contribution is less than $2086, so if they divert half, that will leave less than $1043 in the KiwiSaver account. That means their matching tax credit will be less than the maximum $1043.
Nonetheless, in most circumstances they will still be better off using mortgage diversion. Calculations show that the only ones who shouldn't bother are people earning less than $26,000 who are either over 55 or 35-55 and investing in riskier KiwiSaver funds.
Even they should still use mortgage diversion if that's the only way they can afford KiwiSaver and they are lucky enough to have a lender who will accept putting the money towards regular mortgage payments.
For bigger earners like you, mortgage diversion is a great idea.
Let's say you earn $125,000. Your $5000 contribution will be halved to $2500, with the rest going into your mortgage. Your employer will still put in $5000 and the $1043 tax credit will bring the total to $8543. That's 3.4 times what you put in.
If your mortgage lender will let you put the diverted money towards your regular payments, that will ease up your finances. Even if that's not allowed, you'll be knocking back the mortgage total, which will be great for you in the long run.
And note that you'll get nearly $4000 more from your employer than in your plan. That's worth a bit of sacrifice to get, surely.
I should add that all of this assumes KiwiSaver incentives remain as they are now. If the Government changes after the election, anything could happen, although the National Party has said it doesn't plan to make major changes to KiwiSaver.
And don't forget that if any future government makes KiwiSaver less attractive, you can always stop your involvement by taking a contributions holiday after a year in the scheme.
Or, if you are a non-employee, you just stop contributing whenever you like.
Q. My wife started contributing to KiwiSaver last year as a non-employee. She paid a token amount to get going, with the intention of paying up to $1043 before the first year was up.
She then started working part-time and is now enrolled as an employee. Her contributions from wages will not make up the $1043 by the first year. Can she make a contribution (not from wages) to bring her total contributions for the first year (and any subsequent years) up to $1043?
A. She certainly can. More on how in a minute. But first, let's explain the situation to others. Now is the time for everyone in KiwiSaver to make sure they get the biggest possible tax credit for their first year in the scheme. If you need to take action, it has to be in the next couple of weeks.
That's because your tax credit will be calculated on how much you - not your employer or the Government, just you - have put into the account in the year ending June 30. And if you wait until late June to top up your account, it's always possible that your contribution won't be processed in time.
Many people won't be eligible for the full $1043 tax credit in their first year. It depends on when you joined KiwiSaver.
To make the calculations a bit simpler, Inland Revenue uses the first day of the month in which you first contribute. So if you made your first contribution any time in February, they would assume you did it on February 1.
That means you would be a contributing member for five of the 12 months of the year ending June 30, so your maximum tax credit for the first year would be five-twelfths of $1043, which is about $435. (To calculate that, divide $1043 by 12 and then multiply your answer by 5.)
While employees have to contribute 4 per cent or 8 per cent of their pay, at least in their first year, non-employees can make a first contribution of any size and then not contribute again until June - as our correspondent's wife plans to do.
Note: There is an exception to the above rules for any employee or non-employee who joined KiwiSaver directly through a provider before October 1, 2007. For them, the start date for their tax credit is the first of the month in which they signed up for KiwiSaver - even if they didn't make any contribution for a while - as long as they made their first contribution by October 31, 2007. This is to accommodate start-up problems for the scheme.
Okay, so you now know what your maximum tax credit is. But you will get that amount from the Government only if you have put in at least as much yourself by June 30. If you haven't kept track of your contributions, most providers will tell you your total if you ask for it. But if you are an employee, some of your contributions will still be with Inland Revenue, en route to your provider. So you'll just have to estimate that amount.
Don't fret too much about that. If you end up putting in too little, that simply means your tax credit will be a little bit smaller. But if I were you, I would err on the side of putting in too much. After all, it's still your money in your KiwiSaver account.
And so to our correspondent's question, on making extra contributions. Anyone can put extra money into their own - or their relative's or anyone else's - KiwiSaver account whenever they want to.
The most straightforward way is to send it directly to the provider. Ring or email to ask how to go about that. Alternatively, you can pay it to Inland Revenue, either at a branch of Westpac bank or by mailing a cheque with your IRD number on the back and a letter saying the money is for your KiwiSaver account. Or you can do it by internet banking, using the "pay tax" option. Put "KSS" for the tax type and zero for the period.
Footnote: Anyone who has struggled to work out their maximum first-year tax credit will be relieved to know that in all subsequent years the maximum is $1043.
Mary Holm is a seminar presenter and author. Her website is www.maryholm.com. Her advice is of a general nature and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland.