Supplementary Retirement Scheme (SRS)
Asked on 18 Sep 2019
Read on DrWealth that there is an optimum age to start, otherwise, there’s a chance we’ll end up paying more tax at the end, is that possible?
Generally, for women who intend to have kids, it most likely won't make sense because the Working Mothers Relief will help them hit the 80k max relief cap very very quickly. They are unlikely to get further relief from SRS. For women, doing RSTU to max out your reliefs is probably the way to go.
For men, generally with CPF and various reliefs, you probably hit 30+k. There's still a wide gap between 30+k to 80k. The question then generally evolves to do Retirement Sum Top Up (RSTU, or voluntary top-up to your SA account), or SRS.
The next question is your income level when you hit the 62 +/- age. Will you still be working then? If so, at what kind of income? 50% of SRS withdrawals are non-taxable, so that means you only need to consider your income then + the SRS withdrawal, minus your reliefs. Withdrawal of all SRS funds (over ten years) can further complicate the calculations.
To put simply, if your withdrawal age starts from 62, and then
At 62, fully retired with no job, and only 50% of withdrawals are taxed, you could pay next to nothing or a few hundred dollars of tax on withdrawals up to 40k (the tax rates change).
As 50% of 40k = 20k, based on current tax rates, you pay 0 tax. If you withdraw 60k, then about 10k starts attracting tax and you pay 150. If you withdraw 80k, then 20k is taxable, and your total tax is 550 (assuming tax rates dont change). Even this works out to be 550/80k or 0.69% tax only. You probably still saved in taxes compared to not doing SRS (not forgetting time value of the tax relief you enjoyed).
The tax issue becomes a problem if a) you are still working when you withdraw from SRS, and b) you are a superb investor able to make your SRS contributions multiply by several times.
But the tax is a 1st world problem - ie you pay taxes when you earn good money, or in the latter case are a good investor. The lousy investor may have lost more in the market than the tax reliefs he enjoyed.
If you are scared of paying more taxes, then the easiest way is don't work when you withdraw from SRS. Assuming you don't work and tax rates don't change, if you withdraw 160k, then the tax payable on 80k is only 3,350. That still works out to be 3350/160k = 2.1%.
If you are withdrawing 160k over 10 years, aiyo, you must have at least 160k x 10 = 1.6 million in your SRS... How easy can you feel not paying tax on 1.6 million?
Tax is a good problem to have (compared to losing money).
Yes, you have to time SRS withdrawals. You have 10 years to withdraw all your SRS and 50% of every withdrawal is taxable.
So the trick here is to only withdraw 40k every year, 20k is taxable, and the tax on 20k with no other taxable income source is $0. So max is 400k.
However, if your SRS monies are paid out via an annuity product, it can pay for over 10 years. 20 or even lifetime. So it's all about planning properly. This also means if you're investing your SRS and it performs 'too well', you may also burst the 400k limit and then pay some income tax.
But the tax won't be too high. 50k withdrawal will only be taxed $200/yr. But note these are from today's tax rates which can change in the future.
So maybe only consider contributing to SRS when your income is higher which means you save more on tax during the year when you contribute it because you don't want to contribute too much too early when you don't save enough on tax.
SRS is a deferred tax system. So in order to use it properly, a number of conditions need to be satisfied. btw, do contribute $1 to have slightly better flexibility for withdrawal (especially if you want to lock in 62 years old withdrawal
(1) you gain nothing if you have no income tax to pay. why lock your money in this case?
(2) the gains are less than the penalty should you choose to withdraw. hence minimum, I would advise people to contribute only if you are at least 7% tax bracket
(3) You will almost confirm save tax when you are at the 11.5% tax bracket.
(4) It is fine to draw 60k or even 80k from your SRS account (which means up to 600k to 800k in SRS is fine). The tax is really marginal (total tax rate on top of it is only 2% of the 10k, and 3.5% of the 10k)
(5) I have not even touched on the time value of money for tax save currently compared to the future. If you save 11.5% tax now, and you put the tax you saved into CPF 4%, it grows to 22% in 18 years time).
E.g you draw 60k. only 30k is income tax assessable. 20k is non-taxable, for the next 10k, you only pay 2%. $200 income tax.
E.g you draw 80k, only 40k is income tax assessable. 20k is non-taxable, for the next 10k, you only pay 2%. for the final 10k, you only pay 3.5%. $550 income tax.
02 Nov 2019
04 Nov 2019