By Peter Richards
Many of my new clients are surprised and concerned when they realise that their heirs could be facing a hefty tax bill.
But when I explain how simple it is to mitigate this through a cashout recontribution strategy, there’s a visible sense of relief. This strategy not only saves money but also provides peace of mind, knowing they’ve taken steps to maximise their legacy.
If you’re between the ages of 59 and 75, it’s worth considering the cashout recontribution strategy. This is a straightforward way to potentially save up to $61,200 on estate taxes, making a significant difference to the inheritance your loved ones receive.
Let’s dive into how this strategy works, the steps involved, and some key considerations.
What is the Cashout Recontribution Strategy?
The cashout recontribution strategy involves withdrawing a portion (or all) of your superannuation balance and then recontributing the same amount back into your super as a non-concessional contribution. This method effectively reduces the taxable component of your super, which in turn lowers the estate tax (often referred to as the super death tax) that your beneficiaries may have to pay.
Before and After: How It Works
To illustrate, let’s consider a simple scenario where you have a super balance of $1 million, all of which is a taxable component. Without any strategy in place, the estate tax upon your death could be up to $170,000.
Here’s what happens when you apply the cashout recontribution strategy:
- Cashout: Withdraw $360,000 from your super.
- Recontribute: Put the $360,000 back into your super as a non-concessional contribution.
After the recontribution
- Your super balance remains $1 million.
- However, the taxable component is now $640,000, and the non-taxable component is $360,000.
The result? The potential estate tax drops to $108,800, saving you up to $61,200.
Who Can Benefit?
This strategy is available to anyone who can access their super, typically those over 60 who have retired or changed jobs, or anyone over 65 regardless of their employment status. Here’s a quick checklist to see if you might qualify:
- Over 60 and retired or changed jobs since turning 60
- Over 65
Furthermore, to recontribute the funds, you or the recipient of the contribution must be under 75, and your total super balance should be under $1.9 million.
Additional Points to Consider
- Work Test Abolished: Since July 2022, the work test has been removed for those aged 67 to 75, making this strategy more accessible.
- Contribution Limits: If your balance was under $1.66 million as of 30 June 2024, you can add the full $360,000 into your super. If it was between $1.66 million and $1.78 million, you can add $240,000, and if it was between $1.78 million and $1.9 million, you can add $120,000.
- Government Co-Contribution: You might be eligible for a $500 government co-contribution.
- Spouse Contributions: Consider contributing to your spouse’s super to balance your super accounts, which can further benefit tax-free pension conversion and possibly enhance age pension benefits for some couples.
Why It’s Effective
The cashout recontribution strategy is a powerful tool for anyone within the eligible age bracket. It’s straightforward, effective, and can save significant amounts on estate taxes.
The brilliance of this strategy lies in its simplicity and effectiveness. Many people are unaware of the potential tax liabilities their beneficiaries might face. By strategically cashing out and recontributing, you can significantly reduce these taxes.
Get Advice
If you think you’re in a position to take advantage of it, I highly recommend exploring this strategy with one of our financial advisors. It’s a proactive step that can make a substantial difference for your loved ones.
Disclaimer
People & Partners Wealth Management Pty Ltd ABN 67 127 250 613 is a corporate authorised representative of Fortnum Private Wealth Ltd ABN 54 139 889 535, holder of Australian Financial Services Licence (AFSL) No. 357 306. The content of this article is for general informational purposes only and does not constitute personal financial advice. It does not take into account your individual objectives, financial situation, or needs. Any advice we provide will be detailed in a formal advice document. The opinions expressed in this article are those of the authors at the time of writing and should not be taken as a recommendation to act. To the extent permitted by law, Fortnum Private Wealth Ltd and its associates accept no liability for any loss or damage incurred as a result of reliance on this communication.
