While it may sound odd to take money out of your superannuation only to put it back in again, this is exactly what a superannuation re-contribution strategy involves. If you qualify, this approach can ultimately help your family save money in the long run. Here’s how it works.
Understanding Superannuation Withdrawals
First, let’s look at when you can access your superannuation funds. Generally, to make a withdrawal, you must meet a "condition of release." For many people, this occurs once they reach their "preservation age" and retire permanently from the workforce. Others may access their superannuation upon turning 65, and there are additional conditions under certain circumstances.
Your preservation age depends on when you were born, with the maximum being 60 for those born on or after July 1, 1964. If you’re over 60, you can typically access your super tax-free.
What is a Re-Contribution Strategy?
Once you’re eligible to access your superannuation, you may want to consider a re-contribution strategy, but this should only be done with the assistance of professionals like Symmetry Accounting & Tax. If your super is not self-managed, you should also be mindful of any fees that may apply.
A re-contribution strategy involves withdrawing funds from your super and then re-depositing them as a non-concessional contribution. Non-concessional contributions are made without claiming a tax deduction. At first glance, this may seem unnecessary, but it helps to shift your super balance into a tax-free component.
Superannuation accounts generally consist of two main types of funds:
Taxable Components: These come from employer contributions, personal contributions where a tax deduction has been claimed, and investment earnings.
Tax-Free Components: These stem from non-concessional contributions.
By withdrawing money and re-contributing it as a non-concessional contribution, you transform taxable components into tax-free components. This is important because when you withdraw from super, tax-free amounts are not taxed. This strategy can reduce the amount of tax your beneficiaries will have to pay when they inherit your superannuation.
Tax Implications for Beneficiaries
The tax treatment of your superannuation when passed on to your beneficiaries depends on who inherits it. If your spouse inherits your super, it is generally tax-free. However, if your adult children are the beneficiaries, they will face a tax of at least 15% on the taxable portion of the superannuation, plus the Medicare levy. By using a re-contribution strategy, you can convert some or all of the taxable component into a tax-free component, potentially saving your children from paying taxes.
Contribution Limits and Considerations
It’s important to note that there are limits on how much you can contribute to your superannuation as non-concessional contributions. The current annual limit is $120,000, but there is a “bring forward” rule that allows you to contribute up to $360,000 over three years, provided you meet the eligibility criteria. Additionally, you cannot contribute more if your total super balance exceeds the $1.9 million cap (this may change). If you’re over 75, you’re no longer able to make these contributions.
Conclusion
If you anticipate that your superannuation balance will not be fully used during your lifetime, a re-contribution strategy could significantly reduce the tax burden on your family’s inheritance. However, it’s crucial to speak with to a professional before making any decisions to ensure you understand the full implications of this strategy.
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