Can you withdraw from accumulation accounts in your SMSF? If you have met a condition of release, the answer is Yes. If you haven’t, the answer is a big No.
Withdraw from Accumulation Accounts in SMSFs
There are two common myths around withdrawals from accumulation accounts.
The first myth is that you can only withdraw from a pension account but not accumulation. That you must start a pension to withdraw money. Wrong. You can withdraw from accumulation if you have met a condition of release.
The second myth is that you can only withdraw from pension and accumulation in a certain proportion. Wrong again. You can withdraw from accumulation (if you have met a condition of release) without any regard to what you withdraw from your pension account.
Financial Advice
First of all, something completely different. Telling a client what to withdraw from what account is financial advice. So if you don’t have an AFS licence, explain all this but don’t tell them what to do. And so for the same reason the following is just as a general comment for your amusement and entertainment.
Condition of Release
Everything depends on you (or your client but let’s assume it is your SMSF) meeting a condition of release. Once you meet a condition of release, the money is yours. You can take out as much as you like. From the account you like. And spend it any way you like.
There is only one obligation. If you have a pension account, you must make the minimum pension payments. If you don’t, your fund looses its tax-exempt (ECPI) status for the entire financial year. Meaning you pay 15% tax on all income. ECPI stands for exempt current pension income.
Tax-free Withdrawal
If you are between preservation age and 65, you might pay tax on the withdrawal. But once you are passed 65, the entire withdrawal is tax-free and there is no limit.
Minimum pension payments
Your accumulation account has no minimum withdrawal requirement. If you are over 65 or have passed another condition of release, you can take out as much or as little as you like.
This is different to your pension account. For your pension account you must withdraw a certain percentage of the opening balance each year. That percentage depends on your age. Click here for more details.
Only withdraw the minimum from pension
Since transfers into your pension account are now limited by the transfer balance cap, it usually makes sense to only withdraw the minimum amount from your pension account and take the rest out of accumulation.
The transfer balance cap now limits what you can transfer into your pension account. So once you take it out, you can’t pay it back in if you have hit your transfer balance cap (TBC). Pension payments don’t give you a debit to your transfer balance account. So why take something out and waste that portion of the cap when you can also take it out of accumulation?
Commutation
An alternative strategy to a withdrawal from accumulation is to make a partial commutation from your pension account. It means you move an amount from your pension account. The amount can be a part of your pension account (part commutation) or the entire amount (full commutation).
Different to a pension payment a commutation gives you a debit to your transfer balance account. And a debit to your transfer balance account means that you now have space for a new credit to your TBA.
Commutations are a reportable event that you must list in your events-based reporting.
And commutations require quite a bit of paper work to prove that the payment really is a commutation and not just a regular pension payment. So there is always the risk that the ATO does not accept the commutation in an audit if the paperwork is not up to scratch.
So if you have an accumulation account with sufficient funds, it is often safer to just withdraw from accumulation.
Income Allocation between pension and accumulation
The second myths probably comes from the fact that you pay tax proportionately to your pension and total superannuation balances. And that proportion is calculated in your actuary certificate. But this is about calculating your tax liability. It doesn’t affect how much you can withdraw from which account.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.