Re-Contribution Strategy
A recontribution strategy is a retirement planning technique designed to reduce the tax burden on superannuation death benefits and optimise super balances between spouses. It involves withdrawing a lump sum from your superannuation account and recontributing the money back into either your own or your spouse’s super as a non-concessional (after-tax) contribution.
Superannuation accounts are divided into tax-free and taxable components. Tax-free components mainly consist of non-concessional contributions, while taxable components include concessional contributions and investment earnings. When withdrawing funds, the proportioning rule applies, meaning any withdrawal mirrors the proportion of taxable and tax-free components in your account.
This strategy effectively converts taxable components into tax-free components.
Eligibility
To implement a recontribution strategy, certain eligibility requirements must be met which include:
Aged 60+ and either:
retired, or
left a gainful employment position
Aged 65+
You must be able to both withdraw from and contribute to your super
Benefits of a Re-Contribution Strategy
The recontributed funds become part of the tax-free component which allows non-tax dependants, like adult children, to avoid paying tax on tax-free components they inherit whereas they would pay tax on taxable components (15–30% plus Medicare Levy).
This strategy also provides options with how you structure your superannuation member balance. You could re-contribute funds into a separate account (i.e quarantining tax free components) which allows you to control withdrawals and designate specific beneficiaries to reduce their future tax liabilities. Keep in mind, if you have an SMSF, you can’t maintain more than one accumulation account for a single member, so you might need to open another super fund.
It is also valuable for managing the Transfer Balance Cap, which limits how much can be transferred to a tax-free retirement phase pension (currently $2M per person). If one spouse is over the cap, they can withdraw funds and recontribute them to the lower-balance spouse’s account, allowing both to maximise tax-free income in retirement.
Factors to Consider
Contributions are subject to contribution caps ($120,000 per annum or $360,000 utilising the three year bring forward provisions)
Age limits apply for non-concessional contributions which is 75 (if you are turning 75, the recontributed amount must be received by your super fund no later than 28 days after the end of the month in which you turn 75).
Your total super balance must be under the transfer cap to make non-concessional contributions.
The recontribution strategy is a valuable tool but it requires careful consideration of your eligibility and unique circumstances. Reach out to one of our Financial Advisers to determine whether this strategy is right for you.
Bobby Ho B.Com(Fin/Mkt), DFS(FP), GDipPA, CPA, SSA
Senior Financial Adviser
(03) 9650 9762
bobbyh@lanteri.com.au
Ground Floor, 1 Collins Street Melbourne Victoria 3000 Australia
