Retirement is something we all will have to deal with at some point in our lives, it is time to enjoy what little free time we have and not worry about finances. For some people, retirement means withdrawing their superannuation to live off of. This can be a great way to ease into retirement, but it is important to be aware of the tax implications of doing so.
What Is A Superannual Fund?
Is an organizational pension program created by a company for the benefit of their employees, and is run by a trustee or trustee. These arrangements are established so that employees can save for their retirement.
It is very important to know what constitutes a super fund that is taxed and what doesn’t. Generally, superannuation funds are exempt from tax until you withdraw money from them. This means that the funds in your account will grow without being taxed, which can be a huge advantage over time.
However, when you do start withdrawing money from your superannuation fund, you will have to pay tax on it. This tax is known as”superannuation tax” and is designed to account for the fact that part of your retirement benefit comes from pre-tax contributions.
Concessional contributions
These are payments made into your super fund from your pre-tax income and are tax-deductible. They include your employer’s super guarantee (SG) contributions and are taxed at 15% when they are received by your super fund.
There are, of course, some exceptions to the rule:
- If you earn $37,000 or less, the tax is paid back into your super account through the low-income super tax offset (LISTO).
- If your income and super contributions combined are more than $250,000, you pay Division 293 tax, an extra 15%.
Non-concessional contributions
Are payments put into your super fund from after-tax income, not tax-deductible, and could be from your own personal contributions you’ve already paid tax on.
Superannuation income streams vs Lump sum withdrawals
Super income streams are also known as pension phase income streams and are paid to you in a steady stream over time. Some of these payments will be tax-free, while some will be subject to taxation at your personal tax rate.
The taxable income component is made up of:
- Employer contributions
- Salary sacrificed contributions
- Contributions by self-employed persons where a deduction was claimed
The tax-free component is made up of:
- After-tax contributions
- Government co-contributions
For people aged 60 and above, the income stream from a taxed super is tax-free.
Withdrawing money from your superannuation fund can attract additional taxes. Speak to an SMSF financial advisor to learn how you can reduce your tax burden.
However, if you’re aged 60 and above, any amount you withdraw from a taxed super fund is generally tax-free.
If you are withdrawing a lump sum from super and are younger than your preservation age (which is only possible in very limited circumstances), the lump sum will be taxed at 20%
Tax On Earnings From Investments
Earning on investment within your super fund is taxed at a rate of 15%. This tax includes interest and dividends, less any tax deductions.
Tax On Death Benefits
Super death benefit is a payment made to the nominated beneficiary or beneficiaries upon the death of the super fund member. This payment is made from the superannuation account of the deceased and can be in the form of a lump sum or an income stream.
The tax-free component is not subject to any tax, while the taxable component depends on the following factors:
- whether the person receiving the benefit is a dependent or non-dependent of the deceased person
- whether the benefit is paid as a lump sum or super income stream
- whether the super is taxable or tax-free (see above), and whether the super fund has already paid tax on the taxable component
- the age of the person receiving the benefit
- the age of the deceased person when they died.
Get Advice With Tax Matters With Your Local Accountants
Because everyone’s tax profile is different, speak to an SMSF financial advisor to see how you might be taxed on your super withdrawals depending on how you’d like to withdraw your super.