Recontribution Strategies that future-you will thank you for
If you're in your 30s or early 40s, retirement planning might not feel like it’s a high priority to think about right now. But understanding recontribution strategies now means you'll be ready to act when the time comes – and that preparation can save your family a significant amount in tax down the track.
A recontribution strategy involves withdrawing a lump sum from your superannuation and putting it back into either your own or your partner's account. Why would you do this? To convert the taxable parts of your super into tax-free components, reducing what your beneficiaries will eventually pay in tax.
How it works
Your super balance has two parts: tax-free (mainly your after-tax contributions) and taxable (employer contributions, salary sacrifice, and investment earnings). When your adult children eventually inherit your super, they'll pay 15-30% tax on the taxable portion. The tax-free portion passes to them without any tax liability.
By withdrawing and recontributing funds, you're converting taxable money into tax-free money.
In simpler terms: Say you have $500,000 in super – $300,000 taxable and $200,000 tax-free. If your adult children inherit this, they'd pay up to $90,000 in tax on that $300,000. By withdrawing and recontributing $300,000, you convert it to tax-free, and they inherit the full amount.
When is this relevant?
This strategy typically comes into play in your 60s and beyond – specifically when you've either retired, left a job, or turned 65. It's particularly relevant if you're:
Approaching retirement with a substantial super balance and want to protect more of it for your children
In your early 60s and transitioning out of full-time work
Part of a couple where one partner has a significantly larger super balance than the other
Starting to think seriously about estate planning and how your wealth will transfer to the next generation
While you might be a couple of decades away from implementing this, it's worth understanding now because the decisions you make about your super contributions today will affect how much you can recontribute later.
Key benefits
The tax savings for your beneficiaries are the main drawcard, but this strategy also gives you more control over how your super is structured. You can recontribute funds into a separate account, giving you better control over withdrawals and who inherits what. This lets you strategically reduce tax for specific beneficiaries. Just note that if you have an SMSF, you'll need to set up an additional super fund to do this, as SMSFs don't allow multiple accumulation accounts for one member.
It's also useful for managing the Transfer Balance Cap – currently $2 million per person. If one partner has built up a larger balance, they can recontribute some of their funds into their partner's account.
What this means in practice: If you've accumulated $2.5 million in super while your partner has $1 million, you can rebalance these amounts so you're both under the $2 million cap. This maximises the tax advantages available to you as a couple.
Important considerations
You can't recontribute unlimited amounts. Contributions are capped at $120,000 per year, or $360,000 if you use the three-year bring-forward rule. There are also age limits – non-concessional contributions stop at 75, with specific timing requirements. Your total super balance needs to be under the transfer cap to make these contributions.
The practical limitation: If you're planning to move $500,000, you'd need to spread it over several years, or coordinate contributions between you and your partner.
The takeaway
This isn't something you'll action tomorrow, but knowing about it now helps you make smarter decisions as you build your super balance. It's one of several strategies that can make a real difference to your retirement outcome and what you're able to pass on.
We recommend having a conversation with one of our advisers as you approach retirement to determine whether this strategy aligns with your goals and circumstances.
Bobby Ho B.Com(Fin/Mkt), DFS(FP), GDipPA, CPA, SSA
Senior Financial Adviser
Ground Floor, 1 Collins Street Melbourne Victoria 3000 Australia
