Supplementary Retirement Scheme (SRS) provides great tax benefits while helping you save for retirement. Unlike Central Provident Fund (CPF), it is voluntary, yet you can still benefit from tax relief when you contribute to your SRS account.
Another difference between CPF and SRS is that you have the option to withdraw the funds in your SRS account in the event of emergencies, although you may have to pay penalties or tax for your withdrawal amount.
Here are 3 ways SRS can help you save tax:
1. Enjoy Tax Relief
As Singaporeans or PRs, you are allowed to contribute up to $15,300 every year to your SRS accounts, while foreigners are allowed to contribute up to $35,700 every year to reduce your chargeable income. If you are not aware, there is a significant jump in payable tax once your chargeable income is more than $40,000.
Considering that contributions to SRS accounts have tax benefits, you should contribute the maximum amount to your SRS. By maxing out your SRS contributions, you will also get to fully utilise the tax benefits of SRS accounts. However, it is important that you have sufficient savings and emergency funds before maxing out your SRS contributions, as early withdrawals before the statutory retirement age will incur a 100% tax, in addition to a 5% penalty fee. That’s why you should always treat your SRS funds as completely tied up until you retire.
2. Invest and Earn Exempted from Tax
As you contribute to your SRS funds, you are also strongly advised to invest them. This is because uninvested SRS funds will only earn returns of 0.05% p.a.. The best part about investing using your SRS funds is that your returns will be tax free or at half the tax when you withdraw the funds. Only 50% of SRS fund withdrawals after the statutory retirement age, within a 10-year withdrawal period, are subjected to tax. In essence, only half of the amount you withdraw from your SRS funds will be taxed, saving you the other half.
This way, you can grow your retirement funds steadily throughout your youth with SRS funds, while also benefiting from tax relief. There are also some investments such as life annuity plans, that are exempted from the stipulated period. For example, if you invested in an endowment plan and started receiving dividends past the 10-year withdrawal period, you’ll still be able to receive 50% of your cash dividends free of tax!
3. Withdraw SRS Funds Tax-Free
While only half of your SRS withdrawals are tax-free after the statutory retirement age, strategizing your withdrawals can help you withdraw most of your SRS funds tax free! This way, you can minimise your tax during retirement, and maximise your SRS returns during your golden years.
For instance, if you retire at 63 years old with $400,000 in your SRS funds, you will only need to pay tax if your annual chargeable income is more than $20,000. Assuming that your only chargeable income is from your SRS funds, where 50% of your withdrawal will be taxed, you can time your withdrawal by withdrawing only $40,000 annually (only $20,000 will be taken into account as chargeable income), for 10 years, paying 0 tax.
However, it’s important to note that if you decide to withdraw early, before the statutory retirement age, 100% of your withdrawal will be taxable, in addition to a 5% penalty fee.
Need help optimising your SRS funds and maximising your tax reliefs? Whatsapp our friendly consultants who are always ready and happy to help you with your retirement plan.
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This is for general information only and does not constitute financial advice. This advertisement has not been reviewed by the Monetary Authority of Singapore.