Using a re-contribution strategy with your super savings can seem quite complex. However, it’s easier than it sounds if you have the right support. When it comes to re-contribution strategy, you withdraw the taxable component of your superannuation and re-contribute the amount as a non-concessional contribution. This will effectively convert your taxable component into a tax-free component to make your savings more effective.
What are the Benefits?
- The tax-free component will increase and be withdrawn tax-free if you are under the age of 60, subject to preservation rules.
- The re-contribution strategy can aid in reducing potential tax payable when getting future account-based pension payments between preservation age and age 60
- Based on your annual income and satisfying eligibility requirements, the Government can contribute $0.50 for every $1.00 of non-concessional contributions you earn, up to a maximum of $500
- The tax-free component is also not taxable if paid as a lump sum death benefit to any of your dependents (including adult children). As a result, you can increase the amount payable to your family or estate.
How does it work?
Firstly, you need to be able to withdraw from your superannuation to implement this strategy. This means that you must either meet a condition of release or you need to have unrestricted non-preserved benefits in your account.
Another requirement is that you must be eligible to contribute superannuation, which means you need to be either under age 67 or the age of 67-75 and meet a work test.
The withdrawal needs to be proportionally withdrawn if your superannuation fund includes both taxable and tax-free components. For example, if your tax-free component is 20 percent of your account balance before withdrawal, then 20 percent of any withdrawal must be tax-free and 80 percent taxable.
For those that are over the age of 60, there is no tax payable on either component unless you are in an unfunded superannuation scheme. Your superannuation fund could withhold lump sum tax from withdrawal at the following rates if your tax is payable:
The aim of this strategy is to withdraw as much of your taxable component as possible, while ensuring minimal tax is paid so the money can be contributed to superannuation without surpassing capacities.
If you are under 60 years old, the re-contribution strategy is most effective if the taxable component that is included in the withdrawal does not surpass the low rate cap. This is because then no lump sum tax will be payable. After the age of 60, you can withdraw any amount tax-free that meets a condition of release.
The next step is to re-contribute the withdrawn money back into your superannuation account as a non-concessional contribution (NCC). It is important to make sure this amount does not create an excess to your non-concessional contribution cap.
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IMPORTANT NOTE: This information is general advice only and does not take into account your personal circumstances, goals and objectives. Therefore, you should consider its appropriateness for your circumstances before acting on this information.