Do I Pay Tax on My Super After 60? The Complete Tax-Free Guide for Aussie Retirees

G’day there! If you’re approaching the big 6-0 or already celebrating life beyond it you’re probably wondering about what happens to your super and whether the taxman still wants a piece of your hard-earned retirement savings. Well I’ve got some ripper news for ya – turning 60 brings some major tax advantages when it comes to your super!

There are some exceptions to the super tax after age 60, and this guide will explain them all. It will also show you how to make the most of your retirement savings. So grab a cuppa and let’s dive in!.

The Short Answer: Super IS Generally Tax-Free After 60!

Let’s cut to the chase – for most Australians, super becomes tax-free once you hit 60 years of age. This is a huge milestone in your super journey and marks a significant departure from the tax rules that apply to those accessing super before turning 60.

When you turn 60, you can usually get your super benefits without having to pay any tax on:

• Lump sum withdrawals
• Regular pension payments from your account-based pension
• Investment earnings within your pension account

You don’t have to pay taxes on your super if you take it out as a lump sum or as a steady stream of income through an account-based pension. Pretty sweet deal, right?.

Why Super Tax Rules Change at Age 60

The Australian government set up the super system with tax breaks based on age to encourage people to save money until they retire. One of the biggest carrots in this approach is that after age 60, super contributions are tax-free.

Before you reach 60, accessing your super usually involves paying some tax on the taxable components. But once you celebrate that 60th birthday the tax rules become much more generous, providing you with greater financial flexibility and more spending power in retirement.

Understanding the Different Components of Your Super

To fully grasp how the tax rules work, it’s important to understand that your super balance may contain different components:

Tax-Free Component

This typically comes from:

• After-tax contributions you’ve made
• Rollovers from other funds where tax has already been paid

Taxable Component

This typically includes:

• Employer contributions (including salary sacrifice)
• Personal contributions you’ve claimed a tax deduction for
• Investment earnings inside your super fund

The taxable component can be further divided into:

• Taxed element: Contributions that were taxed in the super fund (typically at 15%)
• Untaxed element: Contributions not taxed in the super fund (common in some public sector funds)

After 60, both the tax-free and taxable components are generally completely tax-free when withdrawn. This is a big change from the rules that apply before age 60!

How Super Withdrawals Are Taxed After 60

Let’s break down the tax treatment for different types of withdrawals after you turn 60:

Lump Sum Withdrawals

• Tax-free component: No tax payable (same as any age)
• Taxable component (taxed element): No tax payable
• Taxable component (untaxed element): Some tax may apply, but usually at a reduced rate

Account-Based Pension Payments

• Tax-free component: No tax payable
• Taxable component (taxed element): No tax payable
• Taxable component (untaxed element): May be taxable but with a 10% tax offset

The Exceptions: When You Might Still Pay Tax After 60

While the “tax-free after 60” rule applies to most super withdrawals, there are a few situations where you might still have to hand over some cash to the ATO:

1. Capped Defined Benefit Income Streams

If you receive income from a capped defined benefit income stream that exceeds the defined benefit income cap (which was $118,750 for the 2023-24 financial year), you’ll need to pay tax on a portion of the excess amount.

These defined benefit income streams include:

• Lifetime superannuation pensions
• Lifetime annuities that existed before July 1, 2017
• Life expectancy pensions started before July 1, 2017
• Market-linked pensions that were in place before July 1, 2017

In these cases, you’ll need to include 50% of the amount above the cap in your tax return, which will be taxed at your marginal rate.

2. Death Benefit Income Streams

If you receive a death benefit income stream where the deceased was under 60 when they passed away, some tax may be payable depending on your age and the deceased’s age.

3. Accessing Super Illegally

If you access your super before meeting a condition of release (like reaching your preservation age and retiring), the entire withdrawal amount is fully taxable regardless of your age.

Tax Benefits of Converting to an Account-Based Pension

One of the best strategies for many retirees over 60 is to convert their super to an account-based pension. This provides two key tax advantages:

1. Tax-free pension payments: All withdrawals from the pension account are tax-free after 60
2. Tax-free investment earnings: The investment earnings within your pension account (including capital gains) are generally tax-free

This means your money can grow faster without the drag of taxation on the investment earnings – something you don’t get with many other investment options outside super.

Can I Access My Super at 60 and Still Work?

This is a common question, and the answer is – it depends!

If you’re 60 or over and want to access your super while continuing to work, you have a few options:

1. Retire: If you’re between 60-64, you can access your super if you cease an employment arrangement. You’re still allowed to return to work later (even with the same employer), but the key is having that break in employment first.

2. Transition to Retirement: Start a transition to retirement income stream (TRIS) that allows you to draw down on your super while still working. After 60, these payments become tax-free too!

3. Reach 65: Once you hit 65, you can access your super regardless of your work status – no retirement required!

Super Preservation Age vs. Tax-Free Age

It’s important not to confuse your preservation age with the age when super becomes tax-free:

• Preservation age is when you can first access your super if you’ve retired (ranges from 55-60 depending on when you were born)
• Tax-free age is 60, when super withdrawals become tax-free

So if your preservation age is 55 and you retire at that age, you can access your super – but you’ll pay some tax on the taxable component until you turn 60.

Strategies to Maximize Your Tax-Free Super After 60

Here are some effective strategies to make the most of the tax-free status of super after 60:

1. Wait Until 60 If Possible

If you’re close to 60 and considering retiring early, it might be worth waiting until you hit 60 before starting to draw down on your super to take advantage of the tax benefits.

2. Contribute More Before Retirement

The tax advantages of super don’t just apply to withdrawals. Consider maximizing your contributions in the years leading up to retirement to build a larger tax-free nest egg:

• Salary sacrifice: Arrange with your employer to contribute pre-tax income to super
• Personal deductible contributions: Make personal contributions and claim a tax deduction
• Non-concessional contributions: Contribute after-tax money to increase your tax-free component

3. Start an Account-Based Pension

Converting your accumulation fund to an account-based pension not only gives you tax-free income after 60 but also means the earnings inside your pension account are tax-free.

4. Consider Your Partner’s Super

If you have a spouse who’s younger than you, consider strategies to equalize your super balances or make spouse contributions to take advantage of tax benefits across both accounts.

How Much Super Can I Withdraw After 60?

After 60, there are generally no restrictions on how much you can withdraw from your super if you’ve met a condition of release (usually retirement). You can take it all as a lump sum, set up regular pension payments, or mix and match according to your needs.

However, if you’ve converted to an account-based pension, minimum annual withdrawal requirements apply based on your age:

• Under 65: 2% of account balance
• 65-74: 2.5% of account balance
• 75-79: 3% of account balance
• 80-84: 3.5% of account balance
• 85-89: 4.5% of account balance
• 90-94: 5.5% of account balance
• 95+: 7% of account balance

These percentages were temporarily reduced during COVID-19 but have since returned to standard rates.

Will I Pay Tax on Other Income After 60?

It’s crucial to remember that while your super may be tax-free after 60, other income you receive will still be subject to normal income tax rates. This includes:

• Employment income if you’re still working
• Investment income outside of super
• Rental property income
• Government pensions and allowances

So while your super withdrawals won’t push up your taxable income, these other income sources might still result in a tax bill.

Real-Life Example: Sarah’s Super After 60

Let’s look at how this works in practice with our fictional friend Sarah:

Sarah turns 60 this year and has $500,000 in her super account. She decides to retire and convert her super to an account-based pension. Her super is made up of:

• $100,000 tax-free component
• $400,000 taxable component (taxed element)

Before turning 60, Sarah would have paid tax on withdrawals from the $400,000 taxable component (with a 15% tax offset). But now that she’s 60, all her pension payments are completely tax-free, regardless of which component they come from!

Sarah decides to withdraw $40,000 per year from her pension account. She pays $0 tax on this income, and the remaining balance continues to earn investment returns that are also tax-free.

Frequently Asked Questions

Do I need to include my super pension payments in my tax return after 60?

Nope! Super pension payments received after 60 are generally tax-free and don’t need to be included in your tax return (unless you have a capped defined benefit income stream that exceeds the cap).

Can I withdraw my super as a lump sum after 60?

Absolutely! After 60, you can choose to take your super as a lump sum, as an income stream, or a combination of both – all tax-free (with the exceptions noted earlier).

How does super affect the Age Pension after 60?

While your super might be tax-free after 60, it’s still counted in the assets and income tests for the Age Pension. This means your super balance and income could affect your eligibility for the Age Pension and how much you receive.

What happens if I keep working past 60?

If you continue working past 60, your employer will continue making Superannuation Guarantee contributions to your super fund. You can also continue making your own contributions up to age 75 (subject to work test requirements after 67).

Wrapping It Up: The Super Tax-Free Sweet Spot

Reaching 60 is a significant milestone for your super, marking the beginning of what I like to call the “tax-free sweet spot” for retirement savings. The tax advantages available to over-60s make super one of the most tax-effective vehicles for retirement income in Australia.

By understanding the rules and planning accordingly, you can maximize these benefits and enjoy a more comfortable, tax-efficient retirement. Remember though, super rules can change, so it’s always a good idea to stay informed or chat with a financial advisor about your specific situation.

Disclaimer: This article provides general information only and doesn’t consider your personal circumstances. It’s not personal financial advice, so please consult with a professional financial advisor before making any financial decisions.