Whatever you do, don’t wait until retirement before implementing tax-effective retirement strategies. There are a number of tax strategies that can be implemented in the lead-up to retirement that will be just as beneficial, if not more, than once you have retired.
Tax Strategies for Retirement
Tax strategies for retirement include reducing personal income tax, eliminating super earnings tax and minimising death taxes.
These retirement tax planning strategies can quite easily reduce your tax burden by thousands of dollars each year.
Let’s take a look at 8 tax-efficient strategies for your retirement.
1. Salary Sacrifice
Salary sacrificing into super is the act of forfeiting part of your wage in exchange for equivalent increased super contributions.
Salary sacrificing into superannuation is an excellent tax planning strategy in the lead-up towards retirement for a number of reasons.
Firstly, because wages are a taxable form of income, the benefit of salary sacrificing is that you are reducing the taxable income in your personal name. Now, while contributions tax is payable on all salary sacrifice contributions, the contributions tax rate is usually less than the personal income tax that would otherwise be payable on the same amount.
The second tax benefit of salary sacrificing into super is that you are investing more of your wealth into the tax-effective superannuation environment. All investment earnings within super are taxed at a maximum of 15%. Again, this is generally lower than your personal tax rate had you, instead, invested in your personal name.
There are limits on the amount you can salary sacrifice into super each year.
Learn more: Salary Sacrifice Super Contributions.
2. Personal Deductible Contributions
Personal concessional contributions, also known as deductible contributions, are contributions that you make into your super account and then claim a personal tax deduction for.
Personal concessional contributions essentially have the same outcome as salary sacrifice contributions, but are more suitable if you are self-employed or a sole-trader; whereas salary sacrifice contributions are used by employees, who have a salary.
Personal concessional contributions work by contributing personal bank savings into super, then claiming a personal tax deduction for the equivalent amount contributed, when completing your individual tax return.
There are limits on the amount you can contribute to super as a personal concessional contribution.
Learn more: Personal Deductible Contributions.
3. Low Income Super Tax Offset
The low-income super tax offset is a tax-efficient retirement strategy providing you with a tax offset of up to $500 each financial year if you are considered a low-income earner.
The low income super tax offset (LISTO) is not a personal tax offset, but is instead added back into your superannuation balance as an effective reimbursement of contributions tax.
If you earn under $37,000 per year, then you may be eligible for the low income super tax offset.
Learn more: Low-Income Super Tax Offset
4. Spouse Contribution Tax Offset
The spouse contribution tax offset is a tax planning strategy that incentivises one member of a couple to contribute into their spouse’s superannuation account, by providing the contributor with a personal tax offset for doing so.
The maximum spouse offset amount available is $540 per financial year and is based on the receiving spouse’s income and the amount contributed.
There are rules around the amount that can be contributed and claimed as a spouse contribution tax offset strategy.
Learn more: Spouse Super Contribution Tax Offset
5. Transition to Retirement Strategy
A transition to retirement strategy, usually only beneficial if you are aged 60 or over, is a way of creating a tax-efficient retirement strategy through the implementation of two separate retirement planning strategies.
A transition to retirement strategy enables you to reduce your personal income tax, without reducing your after-tax income.
The way it works is by salary sacrificing part of your wage into superannuation, which obviously reduces your take-home pay, but then using your super to commence a transition to retirement pension and drawing down tax-free pension income to replace the amount salary sacrificed.
The same strategy can be utilised with personal concessional contributions and is an effective tax planning strategy in the lead-up to retirement.
Under a transition to retirement strategy, there are limits on the amount of salary you can sacrifice, as well as the amount of TTR pension income you can receive.
Learn more: Transition to Retirement Strategy
6. Account-Based Pensions
An account-based pension is the ultimate retirement tax planning strategy for retirees. An account based pension is not only a tax efficient withdrawal strategy, but also provides tax-free investment earnings.
Once eligible, using your super to commence an account based pension can not only provide you with tax-free retirement income, but also ensures all investment earnings within your pension account (including capital gains) are received completely tax-free – clearly a very tax-effective retirement strategy.
There are limits on how much of your super can be converted to an account based pension.
Read more: Account-based pensions
7. CGT Retirement Exemption
The Small Business Capital Gains Tax Retirement Exemption allows you to disregard all or part of a capital gain that results from the sale of a business or business asset.
The maximum capital gain amount that can be disregarded under the CGT Retirement Exemption is a lifetime cap of $500,000. Depending on your age, the retirement exemption amount may or may not be required to be contributed to a regulated superannuation fund for the exemption to apply.
There are a number of rules and time frames to be met in order to implement the CGT Retirement Exemption.
Learn more: CGT Retirement Exemption
8. Recontribution Strategy
A recontribution strategy is a tax-effective withdrawal and contribution strategy designed to reduce potential tax on super death benefits and protect against potential changes to superannuation rules.
Your superannuation balance will usually consist of a combination of both taxable and tax-free components. A recontribution strategy focuses on effectively converting the taxable components into tax-free components. By doing so, death benefit payments made to non-tax dependants can be reduced or even eliminated. Furthermore, a recontribution strategy can protect against potential changes to super rules that could result in super withdrawals for people aged 60 and over being taxed again.
There are limits on the amount that can be withdrawn and contributed under a recontribution strategy.
Learn more: Recontribution Strategy
The best way to implement appropriate tax strategies for retirement is to engage the services of a financial planner than specialises solely in retirement planning advice. Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Frequently Asked Questions
Here are some frequently asked questions around tax efficient strategies in retirement.
How Do I Avoid Capital Gains Tax When I Retire?
To avoid capital gains tax when you retire, you might consider making deductible contributions to super to offset capital gains tax if the asset sold was owned in your personal name. It might even be wise to wait until you have no other taxable income before you sell the investment, in order to reduce the impact of CGT. Alternatively, if the asset is owned within super, you might consider converting your super into pension phase prior to selling the investment.
What Age Do You Stop Paying Tax in Australia?
There is no age in Australia that you stop paying tax. The payment of tax is not age-based. The payment of personal tax in Australia is determined by your level of assessable income. When it comes to superannuation tax, if you have reached retirement and converted your super into an income stream, then all investment earnings within the account, as well all pension payments will generally be received completely tax free.
Do Age Pensioners Pay Capital Gains Tax?
Age Pensioners do pay capital gains tax if the assessable capital gain resulting from the sale of an asset, together with any other forms of assessable income result in a personal tax liability. The way CGT works is that the assessable gain is added together with any other forms of assessable income (such as wages, Age Pension payments, investment income, bank interest, etc.) and then taxed at your marginal tax rate.
Are Super Earnings Tax Free After 60?
Super earnings are tax free after 60 only if you have met the definition of retirement or attained age 65 and have used your super to commence an account-based pension income stream. Simply turning age 60 does not signify tax-free super investment earnings. However, age 60 generally does mean that super withdrawals are received tax free.
How Much Can a Retiree Earn Before Paying Tax in Australia 2023?
A retiree can earn $18,200 before paying tax in Australia in 2023. This is because the tax-free threshold is $18,200. However, a retiree may be eligible for the low income tax offset, which then allows up to $21,500 to be earned without paying tax. Further, if eligible for the seniors and pensioners tax offset (SAPTO), up to $33,000 can be earned before paying tax.
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