Whether you would like to withdraw your super to pay down debt, go on a holiday, complete renovations or get out of super altogether, it’s important to first understand super lump sum tax (and whether what you’re thinking is actually a good idea!).
There are a few contributing factors that determine the amount of tax you will pay on a lump sum super withdrawal and it’s prudent to get your head around these before making any large financial decisions.
Super Lump Sum Tax
The tax on lump sum super withdrawals is based on your age and the tax components of your super balance.
Now, I know you know your age, but where on Earth do you find your super tax components?
Unfortunately, your super tax components won’t be on your super statement. You might be able to find them by logging in to your account online; but more likely than not, you will need to phone your super fund (or SMSF administrator if you have a SMSF).
When you call them, you want to find out how much of your balance is made up of the tax-free component, how much is the taxable component and how much is the untaxed component. Only then will be able to calculate the superannuation lump sum withdrawal tax.
The vast majority of superannuation account balances will not include a taxable (untaxed) component. However, the untaxed component has been included within this article for completeness.
When Can I Make a Lump Sum Super Withdrawal?
In order to make a lump sum withdrawal from superannuation, you need to have first met a full superannuation condition of release.
The most common condition of release is satisfying the superannuation definition of retirement, which includes:
- Being over your superannuation preservation age and retired, with no intention of returning to full-time or part-time work ever again; or
- Having an employment arrangement come to an end after attaining age 60.
Alternatively, simply reaching age 65 satisfies a condition of release, regardless of your employment status.
There are other ways that you can meet a condition of release, which can be found here. You might even consider contacting your super fund and asking them if your balance includes any unrestricted non-preserved portions. This portion of your super will be immediately accessible to you – just be mindful of any withdrawal tax.
Tax on Lump Sum Super Withdrawals
The tax rate that applies to lump sum super withdrawals is detailed in the table below:
| Age | Tax Rate on Tax-Free Component | Tax Rate on Taxable (Taxed) Component | Tax Rate on Untaxed Component |
|---|---|---|---|
| Under Preservation Age | 0% | Lower of your MTR and 22% | Lower of your MTR and 32% up to $1.705M (over lifetime); then highest MTR |
| Above Preservation Age, but Under 60 | 0% | 0% up to $235k (over lifetime); then lower of MTR and 17% | Lower of MTR and 17% up to $235k; then lower of MTR and 32% up to $1.705M; then highest MTR. |
| Age 60 or Over | 0% | 0% | Lower of MTR and 17% up to $1.705M; then highest MTR. |
Your Marginal Tax Rate (MTR) is based on your other sources of personal taxable income for the year. MTR brackets can be found here.
Importantly, all withdrawals from superannuation must be made proportionally from each component. You are unable to decide which tax component your withdrawal is derived from.
There is no superannuation lump sum tax offset associated with lump sum super withdrawals.
Superannuation Lump Sum Tax Examples
Detailed below are some examples of how tax on super withdrawals is calculated, including a lump sum super withdrawal made while under preservation age, above preservation age but below 60, and aged 60 and above.
For each example, let’s assume you have a superannuation balance of $600,000, consisting of a tax-free component of $300,000 and a taxable (taxed) component of $300,000. And, you wish to withdraw the total balance. Further, we will assume, due to other sources of income, your MTR is 32.5%.
Notice the balance does not include a taxable (untaxed) component.
Lump Sum Super Tax (below preservation age)
The tax on a lump sum super withdrawal of $600,000 while under preservation age would be calculated as follows:
Tax on Tax-Free portion = $300,000 x 0% = $0
Tax on Taxable portion = $300,000 x 22% = $66,000
Total Tax on $600,000 Withdrawal = $66,000
Lump Sum Super Tax (above preservation age but below age 60)
The tax on a lump sum super withdrawal of $600,000 while above your preservation age, but under age 60 would be calculated as follows:
Tax on Tax-Free portion = $300,000 x 0% = $0
Tax on first $230,000 of Taxable portion = $230,000 x 0% = $0
Tax on remaining $70,000 of Taxable portion = $70,000 x 17% = $11,900
Total Tax on $600,000 Withdrawal = $11,900
Lump Sum Super Tax (aged 60 or above)
The tax on a lump sum super withdrawal of $600,000 when aged 60 or above would be calculated as follows:
Tax on Tax-Free portion = $300,000 x 0% = $0
Tax on Taxable portion = $300,000 x 0% = $0
Total Tax on $600,000 Withdrawal = $0
This video explains when you can access your super tax-free.
Should I Make a Lump Sum Super Withdrawal?
What you do with your super is up to you. However, a common mistake I see people make all the time is withdrawing their super because they ‘don’t like super’ or are ‘unhappy with super returns’.
Super is nothing more than a tax structure. In fact, it’s like Australia’s little tax haven. All super does is provide you with a place to invest your retirement savings and have any investment earnings taxed at a concessional rate. Yes, there are some rules, but the tax benefits usually outweigh the restrictions, particularly if you are still working, or over age 60. As far as returns go, there are hundreds of investment options within super. You can even invest in cash accounts or term deposits if you wish. You do not need to withdraw your super to do so.
All I am trying to say is that most people are usually trying to get more into super as they near retirement – and for good reason. Pulling large amounts out of super without really understanding why is often not a good idea – for several reasons.
It amazes me how many people make such significant financial decisions without understanding the consequences. Don’t be the person that comes to us seeking advice after you have already made a bad decision. If you are considering withdrawing your super, make an appointment with your financial planner first. If you do not have one, 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.
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Thanks for stopping by - Chris
