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Using a re-contribution strategy with your super savings sounds complex and mysterious. But in reality the name says it all – you withdraw some of the savings from your super account and then re-contribute them back into the super system.
Which raises an obvious question. Why take money out of super and then put it straight back in again?
Like most things to do with super, it’s all about the tax benefits you – and your spouse and dependants – could gain from using this type of strategy.
Important: The information in this article is of a general nature only and cannot be considered financial advice.
How a re-contribution strategy works
Implementing a re-contribution strategy simply involves withdrawing a lump sum from your super account, paying any necessary tax on the withdrawal and then re-contributing the money back into your super account as a tax-free non-concessional contribution. When you withdraw this again at a later date, you do not need to pay tax on it, as your contribution was from after-tax money.
Good to know
A key reason for using a re-contribution strategy is to reduce the taxable component of your super account and increase the tax-free component.
When you re-contribute the money into the super system, however, it doesn’t have to go into your super account. It can also be contributed into your spouse’s super account (subject to the contribution rules).
Understanding your super benefits
When you try to get your head around how a re-contribution strategy works, it’s important to realise that the money in your super account is classified into two separate components:
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1. Tax-free components
The tax-free component (or exempt component) of your super account is generally the contributions on which you have already paid tax, so you don’t pay tax on them again when they are withdrawn.
Tax-free components mainly include your non-concessional (after-tax) contributions and the associated investment earnings.
The tax-free component is always paid to you without a tax bill, regardless of your age when you take your super benefit, or who you leave your benefits to if you die.
2. Taxable components
The taxable components are generally your concessional contributions (such as SG and salary sacrifice contributions) of your super account and are calculated as follows:
Total super account balance – Non-concessional contributions
= Taxable component
You may have to pay tax on the taxable component of your super account depending on whether you withdraw it before or after age 60, and whether you leave your benefits to someone who the tax laws consider a dependant or a non-dependant. For more information, read SuperGuide article A simple guide to what tax is payable on super death benefits.
Need to know
For a re-contribution strategy to be worthwhile, a large part of your super benefit needs to be taxable components, as the aim of the strategy is to reduce the taxable component and increase the tax-free component.
If only a small part of your super benefit is taxable components, it may not be worthwhile considering implementing a re-contribution strategy.
Withdrawing from your super account
Before using a re-contribution strategy, you also need to check the rules about how you can withdraw money from your super account.
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Whenever you make a lump sum withdrawal from your super account, you must withdraw it in the same proportions as the tax-free and taxable components in your super account.
For example, if your super account has an 80% taxable component and 20% tax-free component, your withdrawal amount will consist of 80% taxable component and 20% tax-free component. Withdrawals cannot be made from only one component of your super account.
For more information, read SuperGuide article Proportioning rule and super tax: What it is and why it matters.
Know the tax rates when making a withdrawal
The tax-free component of your super benefit is always paid to you tax free, irrespective of your age.
The tax treatment on your taxable component depends on your age:
- If you are over age 60, your taxable component is tax free.
- If you are between your preservation age and age 60 and you withdraw a lump sum from the taxable component of your super account, tax is payable on some of your benefit.
The amount you withdraw from your taxable component up to the annual low-rate cap ($215,000 in 2020/21) is tax free, but amounts above the cap are taxed at 17% (including the Medicare levy) or your marginal tax rate, whichever is lower.
The low-rate cap is a lifetime limit – which means it’s the total amount you can take over your lifetime even if you make several withdrawals – and it’s indexed annually.
For more information, read SuperGuide articles Your tax guide to accessing your super under age 60 and Your tax guide to accessing your super over age 60 benefits.
Need to know
Always seek professional advice from an independent tax or financial adviser before implementing a re-contribution strategy, as it involves complex tax calculations and eligibility rules. You also need to be careful not to exceed your annual super contributions caps.
You should also confirm with your adviser or super fund that you are eligible to contribute the money back into the super system before making any withdrawals.
When can a re-contribution strategy help?
There are a several situations where a re-contribution strategy can be valuable:
1. Estate planning
On your death, when the taxable component of your super account is paid to someone considered a non-tax dependant under the tax laws (such as an adult child), they may have to pay a significant part of the benefit in tax. (Spouses and dependants aged under 18 do not have to pay tax on a payment.)
Using a re-contribution strategy to reduce the taxable component of your super benefit can cut – or even eliminate – the tax payable by your non-tax dependant beneficiaries.
2. Tax planning
If you are aged under 60 and take a lump sum when you retire, the taxable component will be taxed at your marginal tax rate or 17%, whichever is lower. The tax-free portion is paid to you tax free. Using a re-contribution strategy to convert your taxable component into a tax-free component could reduce your tax bill.
3. Utilising both spouses’ transfer balance caps
By re-contributing some of your super benefit into your spouse’s super account, you can both hold up to $1.6 million in retirement phase super accounts. This means as a couple you can have up to $3.2 million invested in tax-free income streams.
Using a re-contribution strategy can allow you to use each partner’s transfer balance cap, with two account balances available to reduce the tax-free component and tax payable to non-tax dependants.
4. Access government super contributions
Making a non-concessional re-contribution into your spouse’s super account may mean you are eligible for a spouse contribution tax offset (up to $540 a year), while your spouse may be eligible for the government’s co-contribution payment.
Am I eligible to use a re-contribution strategy?
To implement a re-contribution strategy with your existing super benefits, you need to be eligible to withdraw a lump sum from your super account and you also need to be able to re-contribute the money back into the super system. This usually means you are:
- Aged 55 to 74 so you are eligible to both withdraw from your super account and still make contributions
- Retired or have met a condition of release to access your super
- Able to still make contributions into super, so you need to meet the requirements of the work test or work test exemption if you are aged 67 to 74.
10 points to consider before using a re-contribution strategy
If a re-contribution strategy sounds like it could help you achieve your retirement or estate planning goals, there’s some important points you should bear in mind before taking the leap:
- Any financial strategy solely designed to reduce your tax bill could be viewed as tax avoidance by the ATO and could impose heavy penalties.
- Your taxable income – and tax bill – could increase in the financial year when you make the withdrawal from your super. It could also reduce any tax offsets or family assistance you receive during that financial year.
- If you are aged under 60, you may need to pay some tax on the lump sum you withdraw from your super account.
- Any re-contributions you make into your – or your spouse’s – super account are subject to the normal contribution rules and caps. For more information, read SuperGuide article Beginner’s guide to making super contributions.
- Once you turn 67, you will need to satisfy the work test or work test exemption to make a contribution into your super account (other than a downsizer contribution).
- Withdrawing a lump sum and re-contributing money into your super account could affect both your total super balance (TSB) and transfer balance cap. Your TSB needs to be under $1.6 million on 30 June of the previous financial year to be eligible to make non-concessional contributions in the following financial year. For more information, read SuperGuide article Total Superannuation Balance: When it applies and what is included.
- You may have to pay transaction costs – such as a buy/sell spread or capital gains tax – on any investments your super fund has to sell to pay for your withdrawal and re-contribution. For more information, read SuperGuide article Buy/sell spread costs: why these charges may shrink your super.
- If you exceed your non-concessional (after-tax) contribution cap ($100,000 in 2020/21 or $300,000 if you are eligible to use a bring-forward arrangement) when making a re-contribution, you may have to pay additional tax. For more information, read SuperGuide article What to do if you exceed your super contributions caps.
- You will need to pay professional advice fees to implement this type of strategy, as it requires complex calculations to work out the tax impact and most effective amount to withdraw and re-contribute into your super account.
- If you have previously triggered a bring-forward arrangement or have made large non-concessional contributions in the current financial year, you may not be able to re-contribute the money back into your super account without exceeding your non-concessional contributions cap. For more information, read SuperGuide article A super guide to understanding the bring-forward rule.
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