Asked by Anonymous
Asked on 22 Jul 2019
Hello, I'm making some plans for my CPF and have been wondering if I should focus on SRS over RSTU. Why or why not? Anyone has any thoughts to share?
Both will confer tax relief benefits, so we shall not compare based on that. The important thing to note is that if you are doing RSTU, you will help yourself hit FRS faster and compounding takes care of the job there after. Also, once you hit FRS, you will not be able to contribute, and will have to turn to SRS, but hitting FRS earlier means more time for compounding. Of course, you must be comfortable with the fact that a large part of your monies are pretty much locked up in RA/SA and any changes in CPF rules will change the situation and you can't do anything about it.
On the flip side, SRS will give you the benefit of knowing that you can start withdrawal at 62. However, compared to SA's 4% interest, SRS monies do not earn anything (it's bank interest, which isn't much, really) and hence you must be prepared to invest them to get better returns.
I do help clients deploy SRS funds in a variety of asset classes, so if you need some ideas you can contact me.
A little variation off Elijah's reply, with my own perspective now in my third year of pursuing the two.
A) cpf sa earns 4%, no matter what.
B) the money in SRS has to be invested to show better than probably 0.1% interest. And when it comes to investing, then two things kick in - the transaction fees (there are additional transaction fees for srs investments, small but definitely incremental vs investing in cash), and timing / length of investing.
C) putting $$ in either means taking money out from your cash side. The tax relief is real, but it can also be pretty rough if something bad happens (eg retrenchment, or hospital bill) and you can't depend on either to save your most immediate pressing financial concern.
D) on timing of withdrawals, srs (if you have the acct now), you can start withdrawing when you reach 62. For cpf on the other hand, assuming no changes, and you already hit FRS by 55, it is very possible you are accessing the "excess returns" as early as 55.
E) you dont pay tax on the "excess returns" you withdraw from cpf (above your choice of the brs / frs / ers). 50% of the withdrawal from srs will be taxed. I would think that say if you have 1 million in srs, and start withdrawing 100k at age 62, then 50k is tax free, and you would start paying tax on the next 50k on top of your other taxable income.
This is a first world problem though (paying tax is better than being broke).
F) From my female colleagues, I learnt they have not much benefits from doing srs as they generally hit the max 80k relief cap from working mothers relief, cpf relief etc. So they probably only need to consider at most the cpf mstu / rstu.
I have two rules of my own. 1) if I think I cant beat 4% (use last yr srs portfolio return as reference) I prioritize the cpf top up first.
2) to balance on issue C above (远水救不了近火), and I dont think I earn that much, I finally decided that a healthy amount to put into the reliefs was my annual bonus. Coz I would want cash to deal with the rainy days, even though I would end up paying more tax next year. My tax bracket wasn't that high till I should max out both.
I do have a strong feeling that if your incremental tax rate is greater than 15+%, it would probably make sense to max out both (i have not mathematically proven this, its just a hunch).
If you are young, prioritise the SRS contribution scheme because you too can invest long term with a strategy that delivers at least 4% p.a returns.
If you are between the age of 50-55, your investment timeframe may be short. You may then prioritise the CPFSA top up scheme. Total CPF amounts above FRS can be cashed out at age 55 which may not be too far away.
If you want flexibility to cash out, SRS offers more flexibility. However, you should re-examine if the retirement schemes are suitable for you in the first place.
Some other things to note
1) You may contribute to both. Need not prioritise. But ensure your total reliefs are more than $80,000
2) Cap for RSTU if your CPFSA is at $176k To read further: https://www.theastuteparent.com/2017/10/tips-on-relief-using-srs-contribution-cpfsa-top-up-and-voluntary-cpf-contribution/
Hope it answered your question. Good luck