- Published on 19 Jul 2023
- - What is Financial Planning?, Self Managed Superannuation, Investment & Financial Advice, Transition to Retirement
A recontribution strategy refers to a strategy where individuals withdraw money from their superannuation (super) account and then contribute it back as a non-concessional (after-tax) contribution. This strategy is primarily used to reduce the taxed elements within the super account, particularly when individuals are nearing or have reached their preservation age.
Here's how a recontribution strategy works to reduce the taxed elements in super:
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Preservation Age: The preservation age is the age at which individuals can access their super if they are retired or meet specific conditions. The preservation age varies depending on the individual's date of birth.
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Withdrawal: Once individuals reach their preservation age and retire, they can withdraw money from their super account. The withdrawn amount may consist of two components: taxable and tax-free elements.
a. Taxable Elements: The taxable component of the withdrawal consists of both the taxable (pre-tax) contributions made by the individual and the associated investment earnings. This component is subject to tax when withdrawn.
b. Tax-Free Elements: The tax-free component of the withdrawal consists of non-concessional (after-tax) contributions made by the individual. This component is not subject to tax when withdrawn.
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Recontributions: After withdrawing money from their super account, individuals can recontribute it back as non-concessional contributions.
a. Non-Concessional Contributions: Non-concessional contributions are made from after-tax income or assets, meaning that individuals have already paid tax on these funds before contributing them to their super account. Non-concessional contributions do not attract additional tax within the super fund.
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Tax-Free Components: By recontributing the withdrawn amount as non-concessional contributions, individuals increase the tax-free component within their super account. These contributions become part of the tax-free element, which is not subject to tax when withdrawn.
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Tax Advantages: The recontribution strategy aims to reduce the overall proportion of taxed elements within the super account. This strategy can be particularly advantageous for individuals who have a higher proportion of taxable components in their super.
a. Tax Savings: By increasing the tax-free component, individuals can potentially reduce the tax liability on future withdrawals from their super account.
b. Estate Planning: The recontribution strategy can also be used as an estate planning tool. By increasing the tax-free component, individuals can ensure that their beneficiaries receive a larger portion of their superannuation without incurring tax obligations.
We have prepared the following example of how this strategy can help you. Particularly when considering the potential taxation to "Non-Financial Dependants (E.g. Adult Children)
In this example, we have a client who has a total Super balance of $1,253,365.83 with 2.3% of his total benefit untaxed ($28,868.04). Generally speaking, the untaxed element are those contributions for which an individual or employer did not claim a deduction.
We can see the change following the client withdrawing $110,000 from the Super account (In Pension phase as a transitional retirement income stream) and recontributing it back as a Non-Concessional Contribution. In the first year, we have increased the untaxed element from 2.30% to 10.88% and have potentally reduced the tax liability to the estate (On the clients passing and 100% of the balance paid to Non-financial dependants) from $183,674 to $167,554. Having used this strategy till the age of 69 in this example, we have reduced potential estate taxes from $183,000 to $88,000. A reduction in potential taxes of close to $100,000.00!
It's important to note that superannuation rules and regulations can be complex, and the effectiveness of a recontribution strategy depends on individual circumstances. It is advisable to seek professional financial advice to understand the specific implications and benefits of such strategies in relation to your personal situation.
Why not take the next step and talk to a qualified financial planner?
LifeTime Financial Group are specialist (holding appropriate accreditations) advisors who are ideally positioned to assist you with your financial and estate planning requirements.
If you would like to discuss how a recontribution strategy vould help you, or your wider financial planning needs, why not call us today on 03 9596-7733? There is no cost or obligation for our initial conversation/meeting.
Alternatively, please make an appointment using our online Book an appointment (Blue button above)
LifeTime Financial Group. A leading privately-owned Melbourne-based Financial Planning practice with no ties to any financial institution.