Can I start an SMSF with $100k? How much money is required to start an SMSF? There are many ways to ask this common question. The answer to it is often complex though, and strongly depends on your personal circumstances.
What are the cost differences?
Costs incurred by SMSFs are generally higher than equivalent costs for your ordinary super fund. This is due to economies of scale effect. Regular retail or industry super funds are huge, and as a result they can keep their costs down.
This also applies to investment costs too. Large super funds will pay less in brokerage fees than SMSFs.
Additionally, compliance for SMSFs is more complex and often requires more professionals to be involved for activities such as lodging tax returns and performing audits. There are also recurring government fees from the ATO and ASIC when corporate trustees are used, which is standard practice.
There are more differences when it comes to administration and compliance too.
All this begs the question, why start an SMSF? (check out our other blog on that). If we stick to purely financial reasons, it becomes “worth it” to start an SMSF once they start to accumulate wealth faster than what an ordinary super fund would. This breaks down into income coming in, growth in asset value, and expenses going out.
Want to learn more about how to decide?
Income coming in for an SMSF is similar to what you would get in an ordinary super fund if the investment profiles are similar . Growth in asset value is unique to SMSFs though, and in your ordinary super fund you would only own a share of an asset through your selected investment strategy, and not the whole thing like an SMSF can.
Expenses going out for an SMSF are higher as we mentioned above. However, your retail or industry fund charges you based on the percentage of your super, plus some additional fees that vary amongst providers.
Because SMSF fees are flat (in most cases), the percentage of fees goes down as your fund balance increases, to the point where they are cheaper in real terms than having an ordinary super fund.
How much is enough to start an SMSF then?
To us, the answer to this is one of degrees, and much depends on personal preference. If you individually, or with your family and friends combined, have enough in super that it’s cheaper to start an SMSF, then you should consider it if you are also enthused by the additional benefits.
If you’re not quite there yet in terms of super balance, does that mean you shouldn’t start one? Well, not quite in our opinion. Factors such as your age, your income profile, ability to make voluntary contributions, and plan for what you would invest in with your SMSF, all play a part in the decision making process.
If you are young enough with 30 years or more left of working, then you may consider higher initial percentage fees in your SMSF in its first few years an acceptable price to pay to give you access to the investments you want to make right now. Depending on your investment performance, it’s possible that the costs lessen relatively too if you out perform your current super fund.
Similarly, if you’re considering buying a property with your SMSF, you might be weighing the extra years of house price growth you could get by starting an SMSF now against the fee difference you will incur until your SMSF fees are lower than your super funds’.
Conclusions
The amount of super needed to start an SMSF is personal. If your balance is already high, then it depends on if you want to for the financial and other benefits.
If you’re not quite there yet but you have an investment plan you are keen to enact, then it’s still something you can consider if you are happy with the risk and aren’t being unrealistically optimistic.
Please, take care though and give it due consideration, seek professional advice if you need to.
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