It is the time of the year when the focus is on the Supplementary Retirement Scheme (SRS) again as the deadline for contributing to the SRS draws closer.
Despite the benefits that come with the Supplementary Retirement Scheme (SRS), it is often overlooked as some find it difficult to understand how the scheme works.
In a snapshot, the SRS is a voluntary scheme to encourage us to save for retirement, over and above our CPF savings. Each dollar of SRS contribution will reduce our income chargeable to tax by a dollar in the next Year of Assessment (YA). Besides, only 50% of the withdrawals from SRS are taxable after retirement age and investment gains in SRS accumulate tax-free before the withdrawal.
How Can We Benefit From SRS?
We illustrate using an example:
1. Enjoy Tax Savings
Assuming you have a taxable income of $72,000 before tax-relief from SRS,
Tax payable on $72,000 = $550 (on first $40,000)* + $2240 (7% X $32,000)*
If you contribute $15,300 in SRS by 31st December 2018, you can claim $15,300 of tax relief in the Year of Assessment (YA) 2019.
Your taxable income would be= $72,000 – $15,300 (tax relief enjoyed) = $56,700
Tax payable on $56,700 =$550 (on first $40,000)* + $1169 (7% X $16,700)*
Your tax savings with SRS = $2790 – $1719 = $1,071
*Based on IRAS’ current income tax rates and brackets.
**Please note that from the Year of Assessment 2018 (when income earned in 2017 is assessed to tax), there is a personal income tax relief cap of $80,000.
At retirement age, you can spread withdrawals from SRS for up to 10 years.
If you have saved $400,000 in SRS at age 62, you can withdraw $40,000 each year over 10 years. Since 50% of withdrawals are not taxable with SRS, only $20,000 (50% x $40,000) is taxable.
Based on current tax rates, the first $20,000 is not taxable and hence you do not have to pay any taxes if you have no additional income.
Important Pointers About SRS
There are some key areas about contributing and withdrawing from your SRS account that would be useful for you to know if you are considering to make use of it.
1. SRS Contributions
The current cap of contribution to SRS each year for Singaporeans and PRs is $15,300 and $35,700 for foreigners. All SRS contributions must be made in cash and contributions can be made any time and any number of times in a year before 31 December each year to enjoy tax reliefs in the Year of Assessment (YA) the next year.
2. SRS Withdrawals
SRS withdrawals could be made in the form of investments. There is also a tax exemption of up to $400,000 for SRS funds deemed withdrawn upon demise, or withdrawn in full on the grounds of terminal illness.
How Can I Get Started?
If you are keen to enjoy tax-savings using SRS, it is not difficult. Here are the steps to get started:
- Step 1: Open an SRS account with DBS, OCBC or UOB and contribute cash to your SRS account.
- Step 2: You can invest your SRS in shares, bonds, unit trusts, fixed deposits and insurance products from financial institutions to gain a better return on your monies contributed to your SRS account. Monies left in SRS account earn an interest of 0.05% p.a. currently as offered by the 3 banks.
- Step 3: IRAS will grant the tax relief to you automatically in the year following the year of contribution provided, based on information provided by the SRS operators.
I hope this article has been useful for you to understand the features and benefits of SRS. In the next article, we share about options you can consider to grow your SRS.
As we draw nearer to the end of the year, don’t forget to contribute to your SRS by 31st December 2018 to enjoy tax relief in Year of Assessment (YA) 2019.