Early Super Withdrawal Australia: How Much Is Taxed?

Overview

Superannuation, also known as super, is a savings scheme in Australia designed to provide financial security during retirement. However, individuals may face financial hardship due to unforeseen circumstances, leading them to consider early super withdrawal. Understanding the tax implications of early super withdrawal is crucial to make informed decisions.

Tax Rates on Early Super Withdrawals

Early super withdrawals incur a tax of 22% on the taxable portion of the withdrawn amount. The taxable portion varies depending on the individual's age and employment status.

Individuals Aged Under 60

• 100% of the withdrawn amount is taxable.

Individuals Aged 60 or Over, Not Employed

• 0% of the withdrawn amount is taxable.

Individuals Aged 60 or Over, Employed

• 22% of the withdrawn amount is taxable if they are under the preservation age (typically 59).
• 0% of the withdrawn amount is taxable if they are at or above the preservation age (typically 60).

Calculating Early Super Withdrawal Tax

The tax payable on an early super withdrawal is calculated as follows:

Taxable Portion × 22% = Tax Payable

Example

An individual under 60 withdraws $20,000 from their super. The entire amount is taxable, so the tax payable is:

$20,000 × 22% = $4,400

Exemptions and Concessions

There are certain exemptions and concessions available for early super withdrawals, including:

• Compassionate Grounds: Withdrawals for medical expenses, terminal illnesses, or permanent disability.
• Severe Financial Hardship: Withdrawals due to loss of employment, significant medical expenses, or natural disasters.
• First Home Super Saver Scheme (FHSSS): Withdrawals up to $50,000 to purchase a first home, subject to certain eligibility criteria.

Early Super Withdrawal Impacts

It's important to note that early super withdrawals can have significant long-term financial implications, including:

• Reduced Retirement Savings: Withdrawals from super reduce the amount of money available for retirement.
• Tax on Future Withdrawals: Withdrawals made before age 60 may incur a 22% tax on any future withdrawals.
• Loss of Compound Interest: Super investments accumulate interest over time, and early withdrawals forfeit the opportunity for this interest to compound.

Effective Strategies for Early Super Withdrawal

If early super withdrawal is necessary, individuals should consider the following strategies:

• Explore Alternative Options: Consider loans, government assistance, or financial counseling before withdrawing from super.
• Withdraw Small Amounts: Withdraw the minimum amount necessary to meet urgent needs.
• Choose Tax-Free Exempt Events: Withdraw under compassionate grounds or the FHSSS to avoid tax.
• Consider Your Future: Understand the long-term financial consequences of early super withdrawal and plan accordingly.

Tips and Tricks for Early Super Withdrawal

• Seek Professional Advice: Consult with a financial advisor or tax agent for personalized advice.
• Calculate the Potential Tax Liability: Use online calculators or consult with the Australian Taxation Office (ATO) to estimate the tax payable.
• Review Super Statements: Monitor super statements to track contributions and growth.
• Consider Age and Employment Status: Understand the tax implications based on age and employment status.
• Time Withdrawals Wisely: Withdraw at a time when the market is favorable or when other financial options are limited.

Step-by-Step Approach to Early Super Withdrawal

• Determine Eligibility: Check if you meet any of the exemption or concession criteria.
• Apply to Your Super Fund: Contact your super fund and submit a withdrawal application.
• Provide Documentation: Provide supporting documentation to support your claim.
• Receive Approval: Wait for approval from your super fund and the ATO.
• Withdraw Funds: Withdraw the approved amount and pay the applicable tax.

Conclusion

Early super withdrawal can provide financial relief in times of hardship, but it's crucial to understand the tax implications and potential financial consequences. By considering the tax rates, exemptions, effective strategies, and tips provided in this article, individuals can make informed decisions and minimize the impact of early super withdrawals on their financial future.