When it comes to managing retirement savings, strategies that reduce the taxable component of superannuation benefits can make a significant difference. One such approach is the withdrawal and recontribution strategy, which aims to convert taxable components into tax-free components within your super balance.
Why Use a Different Fund or Account?
A technical specialist has advised SMSF members undertaking this strategy to recontribute funds into a different superannuation fund rather than the same one.
The reason? Proportioning rules. When you recontribute to the same account, your balance becomes a mix of taxable and tax-free components. Subsequent withdrawals will then include a tax-free portion, making it harder to fully convert your balance to tax-free status. Over multiple transactions, the tax-free proportion increases, but not enough to eliminate the taxable component entirely.
An Example in Practice
Consider an individual with a $600,000 super balance, all taxable, aiming to make it tax-free. Under current contribution caps and the bring-forward rule, they could:
- Withdraw and recontribute $120,000 in each of two consecutive years.
- Then withdraw and recontribute $360,000 in the third year.
If each recontribution goes into a different account, the entire $600,000 can become tax-free because each withdrawal is 100% taxable. However, if recontributed to the same account, around $153,600 would remain taxable due to proportioning rules.
Special Considerations for SMSFs
For SMSF members, the situation is even more restrictive. An SMSF can only have one accumulation interest per member for proportioning purposes. This means creating a separate accumulation account within the same SMSF won’t help—the withdrawals will still be proportioned based on the combined taxable and tax-free components.
Key Takeaway
To maximize the effectiveness of a withdrawal and recontribution strategy:
- Use a different fund or account for recontributions.
- Understand the proportioning rules and contribution caps.
- Seek professional advice to ensure compliance and optimal outcomes.
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Credits
Sundaram Shanmugam, Smart SMSF Team
