How to Optimise Your Superannuation: Recontribution Strategy
- Deanne Small
- May 29
- 4 min read
Whether you're a Sunshine Coast business owner with your own Self Managed Super Fund (SMSF) or an industry super fund, recontribution strategies can be a game-changer for your retirement savings. They can help deliver tax benefits for you and for financially independent children who are set to inherit your super. Explore what superannuation recontribution strategies are, why they matter, and how you can use them effectively.
What is a Superannuation Recontribution Strategy?
A superannuation recontribution strategy involves withdrawing a lump sum from your superannuation and then recontributing it back into your fund. The goal is to convert taxable components of your super into tax-free components, which can be highly beneficial for tax planning and estate planning.
Why Use a Recontribution Strategy?
Here are some key reasons to consider implementing a recontribution strategy:
Reduce Tax on Death Benefits: By increasing the tax-free component of your super, you can reduce or even eliminate the tax payable by your beneficiaries.
Transfer Balance Between Spouses: This can be particularly useful if one spouse is older and closer to retirement age.
Optimize Super Balance: Helps in managing the total super balance and transfer balance cap effectively.
How Does It Work?
Withdraw a Lump Sum: You need to be eligible to withdraw a lump sum from your super. This usually means you've reached your preservation age and met a condition of release
Recontribute the Amount: Once withdrawn, you can recontribute the amount back into your super as a non-concessional contribution
Tax-Free Component: The recontributed amount becomes part of the tax-free component of your super
Practical Examples
Example 1: The entire super balance is taxable
Jill is 66 and meets a condition of release as she is over 65
Jill has $230,00 in her superannuation account which is entirely made up of a taxable component
Jill withdraws $100,000 from her superannuation fund and subsequently recontributes the full $100,000 back into her super as a non-concessional (after tax) contribution.
Jill’s super balance is still $230,000 but the components of that balance are now as follows:
$130,000 taxable component
$100,000 Tax-free component
Example 2: Part of the super balance is taxable
John is 60 and meets a condition of release as he has reached his preservation age and has retired.
John has $500,000 in his superannuation account
$300,000 is the taxable component (60%)
$200,000 is the tax-free component (40%)
John withdraws $100,000 which would be proportionally
60% taxable, which is $60,000
40% tax-free, which is $40,000
He recontributes the full $100,000 back into his super as a non-concessional (after tax) contribution.
This $100,000 recontribution is tax free
Now, his super balance remains $500,000, but the new tax-free component is $260,000
Calculated from the original $200,000 tax-free
Then add: $100,000 recontributed tax-free
Subtract: $40,000 tax-free withdrawn
The new taxable component is $240,000
As a result, John has increased the tax-free portion of his super from 40% to 52%. This can significantly reduce death benefits tax for non-dependent beneficiaries and increase tax-free income in retirement.
When to Avoid a Recontribution Strategy
While recontribution strategies can be beneficial, they aren't suitable for everyone. Here are some scenarios where you might avoid this strategy:
Ineligibility to Withdraw: If you haven't met a condition of release, you can't withdraw and recontribute.
Impact on Centrelink Benefits: For those receiving Centrelink benefits, recontribution might affect your entitlements.
Reached Contribution Cap Limits: exceeding limits could result in penalties. Check with your accountant in relation to your non-concessional contributions, bring-forward rule contributions and age limits.
Market volatility: Where withdrawing super may require selling shares or investments at a loss; or may trigger capital gains tax that wouldn’t normally apply if your fund is in pension phase. Your financial advisor can guide you in relation to this.
How can ABA Advice Beyond Accounting support your super recontribution strategy?
Superannuation recontribution strategies can be a powerful tool for managing your superannuation effectively. By understanding the benefits and potential pitfalls, you can make informed decisions that maximize your retirement savings.
At ABA, our specialist superannuation accountants can explain the tax implications and help your find the most tax-effective options to suit your unique circumstances. They can also help you manage your SMSF, ensuring your member records are accurately maintained and your fund meets the ATO reporting requirements.
If you’d like to explore a superannuation recontribution strategy as part of your tax planning, contact us to arrange a meeting. Not ready to speak with us yet? No problem. We have a range of articles about superannuation that may help answer your questions.
Here’s what our clients say:
“I met with Katrina for some tax & superannuation advice & am very pleased I did! She was very knowledgeable and provided all the information needed. Most impressed! Even recommended some other colleagues and friends.” – L Parsons-Young
Important note on Superannuation and SMSF Investment Advice
ABA Advice Beyond Accounting are not financial advisers and cannot offer financial or investment advice on your superannuation fund or SMSF investments. ABA always recommend you seek investment advice from a licensed Financial Adviser and can recommend a Financial Adviser if you don’t already have one.
