Recontribution Strategy Example (How the Numbers Work)

A recontribution strategy example is often the easiest way to understand how the strategy works.

The concept itself is simple.

Withdraw money from super.
Contribute it back as a non concessional contribution.
Increase the tax free component of the account.

This article walks through a practical example so you can see how the numbers change.

If you want to test the strategy using your own numbers you can also try the
Recontribution Strategy Calculator.

For a full explanation of the strategy itself see
Superannuation Recontribution Strategy Explained.

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Simple Recontribution Strategy Example

Step 1: Starting Super Balance

Consider a retiree named David.

David is 64 and has met a condition of release.

His super balance looks like this:

Total super balance
$900,000

Taxable component
$600,000

Tax free component
$300,000

This means the proportions inside the account are:

Taxable component
67 percent

Tax free component
33 percent

Each withdrawal from super must contain the same proportion of taxable and tax free components as the account at that time. This is known as the proportioning rule.

You can read more about this here:
Tax Free vs Taxable Components of Super Explained

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Step 2: Withdrawal From Super

David decides to withdraw $360,000 from his super fund.

Because of the proportioning rule the withdrawal must follow the same proportions.

So the withdrawal consists of:

Taxable component
$241,200

Tax free component
$118,800

Even though David may have intended to withdraw only the taxable component, the law does not allow this.

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Step 3: Recontribution Back Into Super

David contributes the $360,000 back into super as a non concessional contribution.

Non concessional contributions are made from after tax money.

This means the entire $360000 becomes tax free component.

You can read more about concessional and non concessional contributions here

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Step 4: New Super Balance

After the withdrawal and recontribution the overall balance remains $900,000.

However the internal components have changed.

Taxable component
$358,800

Tax free component
$541,200

New proportions

Taxable component
40 percent

Tax free component
60 percent

The recontribution has significantly increased the tax free portion of the account.

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Why This Matters for Death Benefits Tax

The strategy is often used for estate planning.

When super is paid to a non tax dependant such as an adult child, the taxable component may be taxed.

In most taxed super funds the taxable component is the taxed element. In those cases, the rate is usually up to 15 percent plus the Medicare levy (currently 2 percent). In other words roughly 17 percent.

Before the recontribution the taxable component was:

$600,000

After the recontribution it is:

$358,800

This means the taxable component has reduced by:

$241,200

If the super was ultimately paid to adult children and the relevant death benefits tax rate applied, a rough estimate of the potential tax difference is:

17 percent of $241,200
$41,004

That is not a guaranteed saving. It depends on the beneficiary, the fund type, and how the death benefit is ultimately paid.

You can read more about death benefits tax here:
How Much Tax Do Adult Children Pay on Super

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Using the Bring Forward Rule

Many recontribution strategies use the bring forward rule.

The standard non concessional contribution cap is currently $120,000 per year.

However the bring forward rule allows up to three years of contributions to be used at once.

This means someone may contribute:

$240,000 using two years of caps
or
$360,000 using three years of caps

Eligibility depends on the person's total super balance at the previous 30 June.

If the total super balance is $2 million or more, non concessional contributions cannot usually be made.

Because contribution caps apply each year, recontribution strategies are often implemented gradually over several years.

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What If the Super Is Already in Pension Phase?

Many people implement recontribution strategies during retirement.

If money is withdrawn from an account based pension, the recontributed amount usually returns to accumulation phase.

Investment earnings in accumulation phase may be taxed at up to 15 percent.

Some retirees address this by:

Starting a new pension with the recontributed amount

or

Refreshing the existing pension.

Refreshing a pension generally involves commuting the existing pension, making the recontribution, and starting a new pension so the proportions are reset.

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When This Strategy Might Be Useful

This type of strategy is often considered when:

A super balance has a large taxable component
The likely beneficiaries are adult children
A meaningful super balance may remain later in life

However it is important to remember that super paid to a spouse is usually tax free.

For many couples the surviving spouse receives the super balance first. The tax issue generally arises only when the remaining assets eventually pass to adult children.

Because of this, the strategy is not necessary for everyone.

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FAQs

What is an example of a recontribution strategy?

A simple example is withdrawing $360,000 from super and recontributing it as a non concessional contribution. This increases the tax free component of the account and reduces the taxable component over time.

How much tax can a recontribution strategy save?

If the taxable component would otherwise be paid to adult children, the tax rate is usually up to 15 percent plus the Medicare levy. Increasing the tax free component can reduce the amount of taxable super passed to beneficiaries.

Why is the bring forward rule often used in recontribution strategies?

The bring forward rule allows up to three years of non concessional contributions to be used in one year. This allows up to $360,000 to be recontributed at once depending on the person's total super balance.

Does the recontributed amount become tax free component?

Yes. Non concessional contributions are made from after tax money so they form part of the tax free component of super.