How does a recontribution strategy work?
Everyone’s super is divided into two parts – a “taxable component” and a “tax free component”. The components are relevant when money is taken out of super – they don’t have anything to do with the amount of tax paid by the super fund.
Despite its name, even the taxable component isn’t usually taxed. For example, if you retire and withdraw your own super during your lifetime after you’ve turned 60, you won’t pay any tax on either of these components. The same is true if you die and your super is paid to your spouse as a lump sum.
But if your super is inherited by someone who is not considered your “dependant” for tax purposes, they will pay tax of at least 15% (sometimes more) on any super classified as a taxable component that they inherit from you. Adult, financially independent children who inherit your super fall into this category.
The classic recontribution strategy has two steps:
- Withdrawal. Once you’re allowed to do so (more on this below), you withdraw an amount from your super balance. For most people, their existing super balance is largely made up of money that’s classified as a taxable component. In other words, it’s come from employer contributions, earnings etc. If most of your super comes from contributions you’ve made yourself without claiming a tax deduction (non-concessional contributions), this strategy might not make sense for you (we’ll discuss this further shortly).
- Recontribution. You put the money back in again as a new non-concessional contribution to super. Usually, the people who do this are allowed to make large non-concessional contributions using the bring forward rules (Non Concessional Contributions: Bring forward rules explained). These new contributions are classified as a tax free component.
(This is also often called a “withdrawal and recontribution strategy” but it’s the same thing.)
The process doesn’t add to your super. But the change in tax components can save your children a lot of money if they inherit your super.
For example, Tim is a 70 year old widower with two adult, financially independent children. He has $1m in super which is all classified as a taxable component. At the moment, if Tim died and his children inherited the super balance, tax of $150,000 (plus Medicare) would be paid. This is 15% of the taxable component of Tim’s super.
If Tim used the recontribution strategy in 2026/27, he might withdraw $390,000 and then put it straight back into his super balance as a non-concessional contribution. Now, his super is still $1m but $390,000 is classified as a tax free component and only $610,000 is a taxable component. If he died the next day, his children’s tax bill would only be $91,500 (plus the Medicare Levy if applicable). This is 15% of $610,000 (just the taxable component). No tax is paid on the $390,000 non-concessional contribution.
Tim has done something pretty simple (taken money out of super and put it back in again) but potentially saved his children $58,500 (plus Medicare if applicable) in tax.
When can I do a recontribution strategy?
You must:
- Be able to access your super (and remember you can’t usually do this before you turn 60). For example, you’re 65 or over or at least 60 and permanently retired.
- Be allowed to make non-concessional contributions (and remember these usually aren’t possible after 75).
- Have a large enough non-concessional contributions cap to make the contributions without creating an “excess” (and remember the size of your cap depends partly on how much you’ve got in super – if you had $2.1m or more at 30 June 2026 your cap is $nil).
- Be comfortable using your cap for this strategy (and remember – this will mean you can’t use it to add to your super).
- Have the cash in your super (or be able to sell / transfer assets) to pay the withdrawal (and remember, if you’re selling or transferring assets, you might have capital gains tax to pay in your super fund).
Other considerations:
Would I still do a recontribution strategy if my super already included some tax free component?
In the example earlier, Tim’s $1m super balance was entirely a taxable component. What if he’d made non-concessional contributions in the past and in fact his super already included a tax free component of $400,000 (and only $600,000 was classified as a taxable component)?
Tim could still do a recontribution strategy and it would still save his children some tax but not as much.
For example, if Tim withdrew $390,000 from his super, it has to be divided proportionately into the two tax components. Since 40% of his super is currently classified as a tax free component, 40% of the withdrawal ($156,000 being 40% of $390,000) would be drawing down on his tax free component. Tim doesn’t get a choice about this – he can’t ask his super fund to only pay his $390,000 withdrawal from the taxable component.
After the recontribution, his $1m super balance would be divided up as follows:
Tax free component = $400,000 (the amount he started with) less $156,000 (the amount included in the withdrawal) + $390,000 (the new contribution), ie $634,000.
The rest of his super ($366,000) would be his taxable component.
Tim has still managed to turn $234,000 of his super from a taxable component into a tax free component ($600,000 - $366,000) but not the entire $390,000. He’d save his children less tax as a result.
Will I get any benefit out of a recontribution strategy or is it all for my kids?
It’s pretty rare to get any benefit out of your own recontribution strategy – mostly people do it because they want to reduce taxes for their children.
However, that’s only because super is currently taxed very generously. Once you get to 60, you don’t pay any tax on the money you take out regardless of whether it’s a lump sum or a pension and regardless of the tax components of your super.
That might change in the future. For example, what if the Government started taxing super withdrawals like they did in the past? It’s likely that Tim wouldn’t pay any tax on his tax free component but would pay it on his taxable component.
This is why some people look at a recontribution strategy as “future proofing” their super.
Why would I do a recontribution strategy if my spouse is going to inherit my super?
Because they might pre-decease you. And they might do their own recontribution strategy for the same reason.
What if Tim didn’t die immediately?
Over time, Tim’s super might grow (thanks to investment earnings) or reduce (because he’s started a pension and is taking money out faster than his investments are growing it).
By the time he dies, the $390,000 in tax free component might have changed. If it’s lower, the whole process won’t have saved his children as much tax as he originally thought it would. In fact, if he takes all his super out during his lifetime, it won’t save them any tax at all.
This – and the fact that Tim won’t necessarily get any benefit out of the strategy himself – explains why people generally do this when it’s easy (eg when their super fund has cash rather than selling lots of assets to do it).
If I use a recontribution strategy can I still add to my super?
Often not – because the money going back in uses up your non-concessional contributions cap.
So most people prioritise adding to their super over a recontribution strategy.
But if you’ve finished adding to your super and are still young enough to make contributions, it can be very effective!
Could I do anything else to make it even better?
Tim could do this more than once. He’s only 70 and can keep making non-concessional contributions for another 5 years. If he’s used the bring forward rules to contribute three years’ worth of non-concessional contributions at once, he’d need to wait three years but there’s nothing to stop him doing it again at that point.
But remember earlier, once he’s done his first recontribution, Tim’s super will include some tax free component. A future withdrawal will have to include some of this (making future recontribution strategies less effective).
Tim could even solve this problem using pensions.
Once a pension starts, it’s kept entirely separate from other super (in an SMSF, this is done in the fund’s accounting records rather than needing separate investments).
Let’s say Tim’s $1m (all taxable component) was a pension account when he did his first recontribution strategy.
He’d withdraw $390,000 from his pension and recontribute this amount back into his super fund. The new contribution isn’t automatically added back into his pension. He could make that happen if he wanted to (it would involve stopping his pension, merging the two super accounts and then starting a new pension with the combined balance).
But a better approach would be to just turn the new contribution into its own pension. Tim would leave two pensions running for the next three years. One of them (his original pension) would be 100% taxable component and the other (the new pension) would be 100% tax free component.
When it comes time to do his next recontribution, he can choose to take the withdrawal from his original pension. That way, he’s taking it all from his taxable component and not including any tax free component. This might seem odd – earlier we said Tim didn’t have a choice and his withdrawal would be divided proportionately. But that rule applies to each super account separately. In Tim’s case, he now has two super accounts. He can choose which one he makes the withdrawal from.
(Note – there are some things Tim should do in terms of the way his accountant classifies his withdrawal to make sure he can put future contributions into new pensions. These revolve around carefully managing his “transfer balance cap” which is explained here Transfer Balance Cap (TBC) explained)
A recontribution strategy, particularly if it involves pensions accounts, is often much simpler in an SMSF than other funds. SMSFs can have lots of accounts (pensions) for each member without ever having to worry about operating different investments, bank accounts etc. In a public super fund, each pension account would be an entirely separate super balance – managed separately with separate pension payments, investments, bank accounts and more. You can read more about strategies like this that are simpler in SMSFs here: SMSF Strategies: Tax, Pension & Recontribution Opportunities
Recontribution strategy: key takeaways
- A recontribution strategy doesn’t increase your super balance.
- It probably won’t benefit you, it will benefit your kids – so most people prioritise adding to their super for their own benefit before they think about recontribution strategies.
- It works by converting some of the taxable component of your super into a tax free component.
- You have to be able to both take money out and put it back in. For most people, the window is between 65 (when anyone can withdraw as much of their super as they like even if they haven’t retired) and 75 (when non-concessional contributions have to stop).
- Pensions can be used to make a recontribution strategy even more effective.
- SMSFs can make advanced recontribution strategies easier to manage.
