A look behind the re-contribution strategy
There can be benefits in withdrawing from your super and re-contributing it. Richard Livingston and Liam Shorte explain the 're-contribution strategy'.
- How to increase your ‘tax-free’ super and improve age pension outcomes
- The strategy and steps you need to take
- The pitfalls to avoid
In preservation age). At the same time you should start thinking about a ‘re-contribution strategy’.
We’ll explain the strategy and why you might use it in a moment, but first a word of warning.
Loss of grandfathering
If your current super pension is ‘grandfathered’ (exempt) from the new age pension Income Test deeming rules (see non-concessional contributions you’ve made to your super account since 30 June 2007 plus the preservation age, but you’re under the age of 60, you’re taxed on the taxable component of any super pension, or lump sum withdrawal, at your marginal tax rate (less a 15 per cent tax offset and subject to the ‘low rate cap’ – see below).
Things are a little different if you’re under the age of 60, since you’re taxed on the taxable component of a withdrawal at your marginal tax rate (less a 15 per cent tax offset). So you need to be careful you don’t end up with a tax bill.
The best way to achieve this is to make a lump sum withdrawal utilising your ‘non-concessional contributions cap. Based on current limits, you can contribute $180,000 in a year, or $540,000 if you’re able to utilise the ‘bring-forward rule’. Exceeding these limits can expose you to penalties.
Ideally, a re-contribution strategy will use cash your SMSF has sitting in a bank account so that transaction costs are kept to a minimum. If you’re happy to spend the time doing the paperwork yourself, you can always implement the strategy more than once if your fund doesn’t have enough spare cash. It’s a question of how much work you want to do.
The re-contribution strategy is generally low cost (or no cost) but the benefits are highly fact dependent. In Part 2 of this article we’ll run through a number of case studies to show when a re-contribution strategy makes sense and when it doesn’t.
Richard Livingston and Liam Shorte are founders of Eviser.
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