What, so you’ve reached age 60 and you suddenly think you’re entitled to tax-free super earnings? Settle down, you’re barely middle-age! While it is possible to get tax-free earnings after 60, there are some things you need to do. Let’s take a look at the simple calculation of tax on superannuation earnings after age 60.
Tax on Superannuation Earnings After 60
Attaining the dignified age of 60 provides you with many opportunities in relation to your super. It may mean full access to your super, tax-free withdrawals and even tax-free earnings.
Despite what many people (and under-educated advisers) think, superannuation investment earnings are not received tax-free just because you have reached age 60. In fact, your age has absolutely no bearing on the taxation of your super earnings.
The manner in which your superannuation earnings are taxed is based on whether your super is in accumulation phase or retirement phase.
Tax on Super Earnings in Accumulation Phase
An accumulation account is an account that can accept contributions and a pension payment is not required to be paid from it.
In the accumulation phase, all investment earnings within the accumulation account are taxed at 15%. However, a 1/3rd capital gains tax discount is applied to realised capital gains, if the asset sold was owned for longer than 12-months, resulting in effective tax of 10%.
A person of any age can have an accumulation account.
Similarly, transition to retirement (TTR) pensions are not considered to be in retirement phase, unless the recipient reaches age 65 while the TTR pension is in force, in which case it should automatically convert to an ordinary account based pension and no longer be a TTR pension.
Therefore, as a TTR pension is not considered to be in retirement phase, all investment earnings from assets supporting the TTR pension are taxed in the same manner as accumulation phase earnings.
Tax on Super Earnings in Retirement Phase
If you have met a full superannuation condition of release and are eligible to access all of your superannuation, you can generally use your superannuation accumulation account (or TTR account) to commence an ordinary account-based pension, with none of the restrictions associated with TTR pensions.
A full superannuation condition of release includes meeting the superannuation definition of retirement, or reaching age 65, yet there are other less common ways too.
If you do decide to commence an account-based pension, all investment earnings including capital gains within the account will be received completely tax-free, regardless of your age.
Generally, you need to have reached your superannuation preservation age and met a full condition of release to be in retirement phase.
This video explains the tax you pay inside super:
Tax on Super Withdrawals Over 60
In most cases, you will be able to withdraw your super tax free as either a lump sum, or income stream if you are over 60 – whether your super is in accumulation phase or pension phase.
This is where most people can get confused. Because, while withdrawals from super are tax-free once you reach age 60, it doesn’t mean that investment earnings within super are tax free once you reach 60. As stated earlier, investment earnings are only tax-free when in retirement (pension) phase.
The only time a withdrawal may not be tax-free when over age 60 is if your balance includes an untaxed component.
Different tax rates apply to tax on super withdrawals under age 60.
Defined Benefit Pensions
The tax on defined benefit pension income, such as the Defence Force Retirement and Death Benefits (DFRDB) Scheme and Commonwealth Superannuation Scheme (CSS) will depend on your age, the tax components that the payment consists of and the portion of the payment that is tax-free or comes from a taxed or untaxed source.
Generally, when over age 60, the tax-free portion of a defined benefit income stream will be received tax free, the taxable portion will also be received tax-free and the untaxed portion will be taxed at your marginal tax rate, minus a 10% tax offset.
The Opportunity Cost Tax
The benefits of structuring your superannuation in the most tax-effective manner as you reach or near age 60 should not be understated. Once you attain age 60, it can be very easy to reduce your overall tax by thousands of dollars each year, without impacting your ability to maintain your current standard of living. Doing nothing in the years leading up to your retirement can be a huge mistake and lead to significant opportunity costs.
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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