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SRS (Supplementary Retirement Scheme) is a tax relief and tax deferral plan that incentivises saving for your retirement. There are benefits in addition to the tax benefits that you should familiarise yourself with first. You can learn about those benefits here.
The tax benefits that SRS offers most simply put are:
Singaporean and PR SRS account holders can contribute up to $15,300 SGD per annum towards their SRS accounts, and can deduct this amount from their taxable income. To maximise the tax savings available through SRS, it's important to contribute the maximum $15,300 SGD every year.
These contributions to SRS can decrease your tax bill by $1,700 to $3,300 each year, depending on your tax bracket. For example, if your income tax bracket is 15% to 22%, your $15,300 SGD contribution immediately saves you $2,300 to $3,300 SGD per annum. That adds up to substantial tax savings over time.
(Assumes $15,300 SGD annual contribution for the full 10, 20 and 30 years length.)
Foreigners can contribute up to $35,700 per annum, as they don't have access to CPF. The tax savings here, assuming a full SRS contribution for 10 years, can amount to upwards of $7,000 SGD per annum, and almost $80,000 SGD over 10 years. Foreigners also can appreciate enhanced flexibility on withdrawals: they can withdraw after 10 years of opening an account, regardless of age, in a lump sum, without penalties.
After age 62, you can withdraw your funds for up to 10 years, and only 50% of each withdrawal is taxable. So, if in a given year you withdraw $40,000 SGD, $20,000 SGD is subject to tax; if you do not have any other personal income, this would be tax-free, as the first $20,000 SGD of personal income in Singapore is not taxable.
Currently, personal income starts getting taxed at $20,000 SGD. This means that, if you do not have any other taxable personal income, you can withdraw up to $40,000 SGD per year tax-free from your SRS account, for 10 years.
The best strategy, therefore, is to minimise any income tax during those 10 years by spreading the withdrawals out if you do not have any other income or if you have steady other income, or by withdrawing less in the years when you receive additional income.
SRS tax benefits are particularly significant for individuals in higher tax brackets. Additionally, the willingness and ability to leave the money in the scheme until retirement age is important, and therefore higher earners are more likely to be confident in their liquidity situation, therefore avoiding the risk of requiring to withdraw the funds for emergency purposes.
Want to learn more about investing your SRS funds with StashAway? WhatsApp us here.