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Tax-Effective Super: How to stop your beneficiaries paying too much tax on your super
As the cost of living continues to rise, those on the verge of retirement are often wondering if they have saved enough over the course of their working life to continue to enjoy their current lifestyle into retirement.
But whilst it’s obviously important to consider how much you have managed to save in superannuation and how much more you need to save in order to reach your retirement goals, it’s also important to ensure that any superannuation you leave to non-dependents in the event of your passing – such as your children – is not diminished by a sizeable tax bill.
One way to do this is by utilising the withdrawal and recontribution strategy.
At Wealth Architects, we are seeing more and more clients look at this strategy as a feasible way to ensure the super they have goes as far as it possibly can.
So, what does this strategy involve and could it be right for you?
In this article, we break down the strategy, its advantages (and potential disadvantages) and showcase how Wealth Architects can help you implement it if it’s a good fit for your circumstances.
What is the withdrawal and recontribution strategy?
The withdrawal and recontribution strategy involves withdrawing money from your super account, and then immediately recontributing it back in as a non-concessional (after-tax) contribution.
You can do this nce you have reached a condition of release.
There are several conditions of release that govern when you can access your superannuation funds in normal circumstances. These are:
- You have reached age 65
- You have reached preservation age and retired
- You are aged 60 – 64 and ceased an employment arrangement
If you do meet the conditions of release, you must then comprehend how your superannuation fund’s money is classified to grasp how a recontribution plan works. There are two parts:
Components that are tax-free
The tax-free (or tax-exempt) component of your superannuation account is normally the contributions on which you have already paid tax, so you don’t have to pay tax on them again when you withdraw them.
Your non-concessional (after-tax) contributions are primarily tax-free. These payments are also tax-free when taken as a lump sum or as a death benefit given to the estate or beneficiaries.
Components that are taxable
The concessional contributions (such as Superannuation Guarantee payments given by your employer and salary sacrifice contributions) kept in your superannuation account are normally taxed.
When you pass away, your taxable component may attract up to 32% tax when inherited by a non-dependent beneficiary (e.g. adult children).
See table below:
Type of super
Effective tax rate (including Medicare levy)
Taxable component – taxed element
Your marginal tax rate or 17%, whichever is lower
Taxable component – untaxed element
Your marginal tax rate or 32%, whichever is lower
So, if you were to leave $250,000 to adult children and your taxable component represented $200,000 of this, they would likely have to pay approximately $34,000 in tax, leaving them with a net amount of $217,000.
The withdrawal and recontribution strategy can help reduce this taxable component, provided you have met a condition of release.
This is because your withdrawals will be tax free.
You can then recontribute this money back into your super as a non -concessional contribution, which form part of your tax-free component and not be taxed when passed to any non-dependent beneficiary.
However, you still need to be aware of your eligibility to contribute and the of non-concessional cap which is $110,000 per annum, or $330,000 if you bring forward 3-years into one.
Who should consider using the withdrawal and recontribution strategy?
Because the goal of this strategy is all about reducing the taxable component of your superannuation, this strategy is suitable for:
- Those with a high portion of their superannuation currently being in the taxable portion
- Retirees who have available room in their non-concessional contribution cap
- Retirees who have tax-free access to their super
- Those wanting to ensure any super funds passed on to non-dependent survivors upon their passing is tax-
Can you execute this strategy on your own?
Whilst it is possible to execute this strategy on your own, it is best to do so with the guidance and precision of a professional financial adviser, such as those in our team at Wealth Architects.
Whilst this is a strategy that might seem simple to understand, the truth is that there are a number of checks and balances that are applied in practice and it could be costly, if performed incorrectly.
As such, it is crucial that you seek professional advice before trying to implement this strategy yourself.
Wealth Architects offers goals-based financial advice to help Australians to help them bridge the gap between where they are now and where they want to be in the future. Our team of expert financial advisers can help you with your retirement planning needs and will provide you with tailored advice suited to your circumstances.
Get in touch with us today to see how we can help you plan for a comfortable retirement.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
Wealth Architects operate from the following locations:
Wealth Architects provide quality trusted financial advice to over 1,500 clients, nationally. Regardless of what stage in life you are at, our qualified and experienced Financial Planners are able to provide you with advice and guidance to help you achieve your goals. We ensure we take the time to listen to you to understand what’s important in your life. Every individual is different, which requires a plan and strategy that is uniquely designed to suit you. This is how the name Wealth Architects was born. With decades of combined experience our approach is holistic, ethical and thorough. We leave no stone unturned in our process and we sweat the small things, so you don’t have to.
Who we help:
A Wealth Architects Adviser can ensure you are extracting sufficient funds from your business into your personal life. This will ensure your hard work is achieving your personal goals – not just your business objectives.
If you are looking for strategies to increase your net wealth, Wealth Architects advisers are experts in accelerating your financial position via proven strategies.
Having a road map before you decide to retire is extremely important. Ensuring your ducks are in a row will put you in the best position to ensure you have sufficient capital when you decide to retire. capital when you decide to retire.
Wealth Architects advisers will ensure your assets are well balanced & structured right for your ongoing income stream.
How we can assist:
Strategy Analysis – Everything we do boils down to giving you the highest probability of achieving the life that you want to live. That’s why we spend a lot of time researching, analysing and preparing financial projections before we put pen to paper.
Cashflow & Budgeting – Cashflow is the lifeblood of any financial plan and we use a very simple structure to maximise your ability to save.
Debt Management – There is good debt and bad debt. We work to accelerate the repayment of bad debt and use good debt where it’s appropriate to increase the probability of achieving your goals.
Tax Planning – Tax is inevitable; however, it can be reduced by effectively structuring your assets and income.
Investment Management – We are unbiased to property, shares or even cash in the bank. All have their place, but what we care about is implementing an investment strategy that you understand, are comfortable with and is aligned with your goals.
Superannuation – It’s generally the most tax effective vehicle to store and accumulate your wealth, and hence it is a fundamental part of our strategy. Choosing the right fund is not just about fees and performance, it’s about understanding your objectives and how much control you would like.
Retirement Planning – Retirement is a significant financial milestone and getting clarity around your retirement goals is just as important as getting the strategy right. In this process we will answer 3 simple questions: How much money do you need? Where will your money come from? How long will this last?
Planning for the Unexpected – Things don’t always go according to plan and when they don’t, it pays to have a safety net. We put a protection strategy in place that you can depend on in the event you, your spouse or your key staff are unable to work due to injury, illness or death.
Estate Planning – It’s important to ensure that your wealth is transferred effectively and in accordance with your wishes, and not anyone else’s. It’s also important that you have someone you trust to make decisions for you if you can’t make them yourself.
Social Security – You have paid tax your whole life, so we work hard to review and maximise your entitlements with Centrelink.
Aged Care Strategies – Planning the move into aged care can be stressful whether it’s for you or your family members. We can minimise this stress by helping you make informed decisions based on sound advice.
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