On retirement, taxes are among the things that most people do not anticipate dealing with. Having dealt with taxes throughout one’s gainful employment period means that most people do not expect to be handling tax issues in retirement. However, as you plan your retirement, it is important to consider how taxes would impact your retirement income.
As you plan your retirement, a financial strategy is important to ensure that your financial affairs remain in order. Part of your financial plan should involve reviewing how you would manage and reduce your tax. That way, you will be able to maximize your investments.
To develop effective strategies that help you reduce taxes, you need to learn how taxes apply to you after retirement. For most people, a big portion of their post-retirement income comes from superannuation funds in form of pensions. Part of the funds such as employer contributions and salary-sacrificed contributions are taxable while other contributions such as the after-tax contributions to super funds and government co-contributions are tax-free.
Tax On Retirement Guide
- How Are You Taxed When You Retire?
- How Much Tax Do You Pay on Retirement Income?
- Types of Retirement Income Streams and What Is Taxable and What Is Tax-Free
- Strategies to Reduce Tax in Retirement
How Are You Taxed When You Retire?
Your age will determine the taxes you pay on the income from superannuation funds. After the age of 60, any benefits you receive would be tax-free. However, you may have to pay tax on your super income stream if you opt to access your super earlier. To access the income, you have to reach your preservation age.
If you are under 60 years, it is possible to withdraw a lump sum amount without paying tax. However, the withdrawal amount should not exceed the low rate threshold, which is $205,000. Any amount you withdraw about the law rate threshold attracts the lower of your marginal tax rate or a 17% tax, which includes the Medicare levy.
Your income stream type also affects the taxability of your post-retirement income. Opting to take the Transition to a Retirement income stream would allow you to access your super funds while you are still actively working. However, that would only be possible after attaining the preservation age of 55 years. It is also possible to withdraw 10% of your super balance annually. The tax on such a withdrawal would depend on your age. Transition to Retirement payments is tax-free if you are above 60 years. There is a marginal tax rate for pension income as well as a 15% offset for anyone between 55 and 59 years.
How Much Tax Do You Pay on Retirement Income?
The amount of tax you pay on retirement income depends on your age and the type of income. For most people, benefits from superannuation are tax-free from the age of 60. If you are aged between 55 and 59 years, your income payment would have two parts. There is a tax-free portion and a taxable portion. The taxable portion is taxed at your marginal rate, less a 15% tax offset. Similarly, if you are younger than 55 years, your income payment would have a taxable portion that attracts your marginal rate and a tax-free portion. However, if the reason for accessing your super while under 55 years is permanent incapacity, your taxation is the same as that of the 55 to 59 years age bracket.
Types of Retirement Income Streams and What Is Taxable and What Is Tax-Free
Super income streams can either be an account-based pension or an annuity. An account-based pension involves a series of regular payments from your super money. On the other hand, an annuity involves receiving a fixed income for the rest of your life or a set period.
The superannuation income is composed of a taxable portion and a tax-free portion. The elements that make up the taxable portion include employer contributions, personal contributions claimed as tax deductions, and salary-sacrificed contributions. Government co-contributions and after-tax contributions make up the tax-free segment.
Several other types of super funds have varying tax implications. They include defined benefit super funds, untaxed super funds, and self-managed super funds. For the self-managed super fund (SMSE), the trust deed defines how you access your money. That then determines your tax on the money.
Untaxed funds are government super funds that do not pay regular taxes on contributions. A member of such a fund pays tax when accessing his/her money. The fund provides more information on the tax obligations and members need to check with the fund to establish the tax payable.
For defined benefit super funds, the fund states to alert members of their eligibility for benefits. The statement states how much of a member’s income would be taxable and how much would be tax-free.
Other than the super income streams, an individual may also access the Transition to Retirement income streams. A Transition to a Retirement income stream allows you to access your super while you are still working. However, to access the money, you must attain your preservation age, which ranges between 55 and 60 years.
TTR only allows you to withdraw up to 10% of the balance each financial year. Lump sum withdrawals are not possible.
In terms of taxes, the tax rates are similar to those of other super income streams and are dependent on your age. The tax rate on TTR pensions is the same as for super accumulation funds, which is up to 15%.
In retirement, you can also have non-super income streams such as an annuity bought with money that is not from super. Such an annuity would give you a fixed income for a set period. The tax rate on the annuity, which would be less than a deductible amount, would be your marginal tax rate. The deductible amount is part of the capital that you receive with each pension payment.
Strategies to Reduce Tax in Retirement
Efficient strategies are key to reducing taxes on your retirement income. Your goal should be to find ways that enable you to optimize your income payments by minimizing tax obligations. To that effect, several strategies may prove very effective in reducing post-retirement taxes.
Using A Self-Managed Super Fund
A self-managed super fund will allow you more flexibility than a conventional super fund. It would also enable you to manage your taxes better. You can plan your buying and selling decisions for securities such that you reduce the effect of capital gains on your income.
Using Rebates and Tax Offsets
There are various tax offsets and rebates by the government available for anyone above the retirement age in Australia. For instance, the Senior and Pensioners Australians Tax Offset (SAPTO) reduces or eliminates tax liability on income outside the super funds’ pension. Total rebate income and marital income determine the amount of tax offset under SAPTO. Another scheme is the Low Tax Income Offset (LITO), which allows a tax offset of $445 for individuals with taxable income below $37,000 per year.
Taking Advantage of the Account-Based Pension Income Stream
If you are over 60 years old, pension income is tax-free. If you opt for an account-based pension, the 15% tax on fund earnings would be eliminated. However, there are minimum pension payment requirements for the account-based pension. The minimum annual withdrawals increase by age. Thus, you can withdraw more than you need under this scheme. For more financial guides on retirement personal finance, check out Grace Life & Wealth.
Timing the Sale of Assets to Reduce Capital Gains Tax
The sale of assets attracts capital gains tax. Thus, even though you earn tax-free income from super funds, you may still incur tax obligations when you sell your assets. To minimize the impact of the sale of assets on your taxes, you can plan the sale such that the proceeds go into your superannuation account. That would ensure that your taxable income remains within the tax-free threshold. The strategy will ensure your capital gains tax remains low.
If you have any inquiries regarding your tax situation, feel free to contact TaxReturn.com.au with your tax issues. Our tax experts will help you sort out your taxes quickly and hassle-free.
*General Advice Warning – “Any financial advice provided by TaxReturn.com.au is general in nature and is not personal financial advice. It does not take into account your objectives, financial situation, or needs. Before acting on any information, you should consider the appropriateness of it regarding your own objectives, financial situation and needs.”