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Withdrawal & Recontribution Strategy
When it comes to managing your superannuation in Australia, there are strategies that can help you maximise your retirement savings while minimising tax obligations for you and your loved ones. One such approach is the withdrawal and recontribution strategy. It’s a lesser-known tactic, but when executed correctly under the right circumstances, it can offer significant financial benefits. So, what is it, how does it work, and could it be right for you? Let’s break it down.
What is the Withdrawal & Recontribution Strategy?
The withdrawal and recontribution strategy involves taking money out of your superannuation account (withdrawing) and then putting it back in (recontributing) as a different type of contribution—typically a non-concessional (after-tax) contribution. The goal? To reshape the components of your super balance, particularly the taxable and tax-free portions, which can have a big impact on your retirement planning and estate outcomes.
Your super balance is usually made up of two key components:
- Taxable component: This is usually the portion of your super that has come from concessional (pre-tax) contributions, like employer contributions or salary sacrifice, plus any investment earnings. It’s subject to tax when withdrawn under certain conditions or passed on to non-dependants after your death.
- Tax-free component: This includes non-concessional (after-tax) contributions you’ve made from your own money. As the name suggests, this portion is generally tax-free when withdrawn or passed on.
By withdrawing funds and recontributing them as non-concessional contributions, you can potentially increase the tax-free component of your super, which can lead to tax savings down the track—either for yourself in retirement or for your beneficiaries.
For example, let’s say you withdraw $100,000 from your super, where 80% is taxable and 20% is tax-free. You then recontribute that $100,000 as a non-concessional contribution. That $100,000 now becomes 100% tax-free in your super account, potentially lowering the tax burden for your estate or withdrawals.
Why Consider this Strategy?
The withdrawal and recontribution strategy isn’t just about moving money around—it serves a specific financial goal. The primary goal of this strategy is to reduce the tax on Death benefits paid to non-dependant beneficiaries. If your super is passed to a non-tax dependant (e.g., an adult child) after you die, the taxable component is subject to tax at 15% (plus Medicare Levy). Increasing the tax-free component can reduce or even eliminate this tax hit.
If you have reached your preservation age and have met a condition of release, you are able to access your Super funds tax-free regardless of your Taxable and tax-free components. Dependant beneficiaries (ie. the surviving spouse) can also receive these benefits tax free. Therefore, this strategy should be considered if you are wanting to minimise the amount of tax payable upon death, and maximise the benefits paid to your non-dependent beneficiaries.
Key Rules & Limits to Know
Like any super strategy, this one comes with rules you’ll need to navigate carefully:
- Contribution Caps: For the 2024-25 financial year, the non-concessional contribution cap is $120,000 per year. However, if you’re under 75, you might be able to use the “bring-forward rule” to contribute up to $360,000 over three years, depending on your total super balance. It is important to note that your non-concessional cap space is dependant on your Total Super Balance (TSB).
- Total Super Balance (TSB): If your super balance is above $1.9 million (the general transfer balance cap as of 2024-25), you can’t make non-concessional contributions. See Table 1 below for available NCC cap spaces depending on Total Super Balance.
- Tax on Withdrawals: Depending on your age and the components of your super, withdrawals might be taxable. For example, if you’re under 60, the taxable component of a lump sum withdrawal could be taxed at up to 20% (plus Medicare Levy).
Table 1 -Bring-forward cap first year (applying to 2024–25 and later years)
Is This Strategy Right For You?
The withdrawal and recontribution strategy isn’t a one-size-fits-all solution. It’s best suited for people who:
- Have reached preservation age and can access their super.
- Have a significant taxable component in their super.
- Want to reduce tax for their non-dependant beneficiaries.
- Have spare contribution room under the non-concessional caps
However, it’s not without risks or costs. Withdrawals could affect your pension payments, trigger tax liabilities, or impact Centrelink entitlements. That’s why it’s critical to get tailored advice before diving in.
Next Steps
If the withdrawal and recontribution strategy sounds like it might fit your financial plan, the first step is to sit down with a qualified financial adviser. They can crunch the numbers, assess your super components, and ensure the strategy aligns with your broader retirement and estate planning goals. Super rules are complex and ever-changing, so professional guidance is key to getting it right.
At P3 Financial Planning, we’re here to help you navigate these opportunities and make informed decisions about your super. Contact us today to explore how this strategy—or others—could work for you.
Disclaimer: The information in this article is general and does not consider your particular circumstances. We recommend specific tax or legal advice be sought before any action is taken and refer to the relevant Product Disclosure Statement before investing in any product. P3 Financial Planning Pty Ltd ABN 61 009 883 292 AFSL 464628
