Knowing when you can access your super is one thing, but knowing when you can access your super tax-free is the golden ticket.
Super rules can be confusing at the best of times, so I’m going to break it down to show you exactly when you can access your super tax free.
When Can I Access My Super Tax Free?
There are three factors that determine when you are able to withdraw your super tax free: your age, the tax components of your super balance and whether the withdrawal is made as a lump sum or income stream.
Let’s take a look at each of these.
Tax on Super Withdrawals Over Age 60
In general, if you’re over age 60, super withdrawals received as either a pension payment or lump sum withdrawal are received completely tax free.
There is one exception though, which I’ll get to.
Tax On Super Withdrawals Under Age 60
If you’re under age 60, there may be tax payable on withdrawals from super, depending on whether the withdrawal is made as a lump sum or income stream and the tax components that your super balance consists of.
Everyone’s super balance is made up of tax-free and taxable components. The ratio of these components is specific to each balance, based on the amount of non-concessional and concessional contributions that were made to your account, plus earnings within the account.
You can contact your super fund to find out the tax components that make up your super balance. It generally won’t show on a superannuation statement.
Tax on Lump Sum Withdrawals Under Age 60
When a lump sum withdrawal is made from your super account, the withdrawal amount must be made proportionately from each tax component.
The tax-free component portion of the lump sum withdrawal will always be received tax-free, even if you are under age 60.
The taxable component portion will be assessed for tax. However, there is a little-unknown thing called the superannuation low-rate cap amount. This allows you to receive taxable portions of a lump sum withdrawal tax free while under age 60.
The low rate cap amount is not an annual cap, however. It is an indexed-lifetime cap. This means that all taxable component withdrawals that you make from super while under age 60 will accumulate towards this one cap year-after-year.
If, over the years, the taxable portion of your cumulative withdrawals remain under the cap, then you will have paid no tax. But, once withdrawals begin exceeding the lifetime cap, the taxable portion of your withdrawals will begin to be taxed at 15%.
Unfortunately, the low rate cap does not apply if you are eligible to access your super while under your superannuation preservation age. Instead, the taxable component of your lump sum withdrawals will usually be taxed at 20%.
Tax on Super Pension Payments Under Age 60
If you are receiving superannuation pension income payments while under age 60, the payments may be fully or partially assessed for tax.
A superannuation pension account will consist of taxable and tax-free components. Unlike accumulation accounts, which have a constantly changing ratio of these components due to contributions, withdrawals and earnings; the taxable/tax-free ratio of a pension account is locked-in on the day the pension account is created.
Like an accumulation account, all withdrawals must be made proportionately from each tax component, based on the ratios.
The tax-free component portion of a pension income payment will be received tax free. The taxable component will be assessed for tax, just like any other taxable income, such as a wage or salary. However, a tax offset equal to 15% of the taxable component portion of the payment is received, which will reduce the tax payable.
For example, if you had a superannuation pension account with a balance of $500,000 that was 80% taxable ($400,000) and 20% tax free ($100,000) and you receive a pension payments of $25,000 for the year – those payments would be $20,000 taxable and $5,000 tax free. No tax would be payable on the tax-free portion; whereas the $20,000 would be added together with all of your other forms of income for the year and taxed at your marginal tax rate. A tax offset of $3,000 ($20,000 x 15%) would then reduce your income tax.
Exceptions to the Rule
For the majority of you, the tax payable on superannuation withdrawals will be as per above. But, in some cases, part of your super balance may include a taxable (untaxed) component, as opposed to the more common taxable (taxed) component.
If part of your super balance does include a taxable (untaxed) component, you will pay a higher tax on withdrawals while under age 60 and you won’t necessarily receive your super withdrawal tax free when over age 60.
So, in a nutshell, super withdrawals over age 60 are generally tax-free, some tax may be payable under age 60 and a higher tax may be payable if your balance includes taxable (untaxed) components – even if you are over age 60.