The first step to creating strategies to reduce tax is to learn as much as you can about how taxes are applied after retirement. The major portion of your income post-retirement is like to come from superannuation funds in the form of pension. A part of the money in super accounts is taxable, including employer contributions, salary-sacrificed contributions, and personal contributions claimed for tax benefits. On the contrary, the after-tax contributions made to super funds and government co-contributions are tax-free.
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How Are Taxes Applied Post-Retirement?
The taxes on the income stream from superannuation funds vary with your age. The good news is that any benefits received from super funds after the age of 60 are tax-free. You can also access your super earlier if you have reached your preservation age, however, you may pay tax on your super income stream.
If you choose to withdraw a lump sum and you are under 60, you don’t have to pay tax if you withdraw up to the ‘low rate threshold’ amount, currently $205,000. If you withdraw an amount above the low rate threshold, you pay 17% tax (including the Medicare levy) or your marginal tax rate, whichever is lower.
The taxability of post-retirement income also varies with the type of income stream. If you choose to take the Transition to Retirement income stream you can access your super funds after the preservation age of 55 while you continue working. You can also withdraw 10% of your super balance each financial year and pay tax on it according to your age. The TTR pension payments are tax-free for individuals above 60 years of age, while the pension is taxed at the marginal tax rate with a 15% tax offset for those between 55 and 59 years of age.
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Strategies to Reduce Tax in Retirement
It is important to consider efficient strategies to eliminate or reduce taxes once you stop working and reach retirement. There is a lot of scopes to optimise tax payments, especially for the income coming from your superannuation account.
Making use of rebates and tax offsets
If you are above the retirement age in Australia, on top of the tax exemptions on income from superannuation funds, you can also apply for various tax offsets and rebates offered by the Government. One of such schemes is the Senior and Pensioners Australians Tax Offset (SAPTO) wherein the tax liability on income outside the super funds’ pension is also reduced or eliminated. The amount of tax offset depends on the total rebate income and marital income. You may also be eligible for Low Income Tax Offset (LITO) that allows a tax offset of $445 if your taxable income is less than $37,000 per year.
Choosing a self-managed super fund (SMSF)
Self-managed super funds are more flexible than the conventional super funds and allow better ways to manage taxes. You can time your decisions of buying and selling securities using an SMSF, thereby reducing the impact of capital gains on your overall income. Retirees can also choose to sell or liquidate their assets and contribute the resulting income towards SMSF for better management of taxes for retirement.
Taking advantage of the account-based pension income stream
The pension income is tax-free for individuals over 60 years of age. Additionally, the 15% tax on the fund earnings can also be eliminated if you choose to commence an account-based pension. However, the account-based pension requires minimum annual pension payments to be withdrawn every year, increasing by age. Therefore, you may end up withdrawing more than you need by using this scheme.
Continue making deductible contributions to your super fund post-retirement
If you continue to pay income tax post-retirement you can use the strategy of making personal contributions to super to get tax benefits. Such contributions will not only reduce tax exposure but also boost up your superannuation account balance. However, such contributions need to be well-managed as they are taxed at 15% and are counted towards annual concessional contributions upper limit.
Time the sale of assets to reduce capital gains tax
Even if your income from super funds becomes tax-free, you may incur taxes on the assets that you hold outside super. In addition to managing your super contributions and income stream to reduce and eliminate taxes, you should consider the tax implications of other assets as well. The sale of these assets can be timed in such a way that the proceeds are contributed to your superannuation account, and your taxable income remains within the tax-free threshold. The strategy, if appropriately timed, can work well to reduce the amount of capital gains tax.
Implement the re-contribution strategy
The re-contribution method is suitable for individuals who have retired and have reached the preservation age of 55 and wish to pass on the tax benefits to their beneficiaries after their death. These retirees can withdraw a lump sum from their super account and re-contribute it as a non-concessional contribution. By doing so, the amount of concessional contribution reduces and that of the non-concessional contribution goes up. The non-concessional contributions are tax-free for beneficiaries after your death, thus reducing the tax for them.
While you pay a significant amount in taxes during your working life, the strategies as mentioned above can help you reduce taxes in retirement and increase your income when you are no longer working. Together with Moore Australia, we can provide our clients with a comprehensive review and personalised retirement strategy to ensure you are on track to realising your dreams and goals as well as effectively managing your tax so you can live your best possible life.
Speak to us today to find out how we can help you with your tax and retirement planning.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.