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I Spent $1 to Open a SRS Account to Fix the Withdrawal Age

I never had an SRS Account. Until now.

The SRS Account stands for Supplementary Retirement Scheme which is a voluntary scheme to encourage people to save for retirement. It is basically our private retirement plan, that supplement the government defined contribution plan, the CPF.

When you contribute to your SRS account, you deferred paying taxes till the designated withdrawal time.

This contribution amount will be a deduction on your total income, to derive a lower taxable income.

During withdrawal time, only 50% of your withdrawal is subject to income tax. How much tax you will pay at withdrawal, will depend on your tax bracket. The idea is that when you retire, you should not earn any ordinary income, so the income tax that you pay on 50% of your withdrawal should be lower than the tax  you pay on your current tax bracket.

The designated withdrawal time, is tied to the current statutory retirement age. The statutory retirement age currently is 62 years old.

If you withdraw before 62 year old, you have to pay a 5% penalty on your withdrawal, and the withdrawal is fully subjected to ordinary income tax. If you withdraw after the designated withdraw period, there will be no penalty.

You will have to withdraw finish your wealth within 10 years. If you purchase an annuity with your SRS, this 10 year restriction is not impose on it.

This is not only available to Singaporeans, permanent residents but also foreigners. For foreigners, after 10 years, they can withdraw in one lump sum and 50% of the value is subjected to tax without penalty.

Thus for both Singaporeans & PR and foreigners, this is the second main way that they can use to reduce their taxable income. The main one, advocated by financial bloggers, is to transfer $7,000/yr to your CPF Special account and another $7,000 to your family member’s CPF Special account.

Currently, the maximum that you can contribute to your SRS is S$15,300/yr for Singaporeans and $35,700/yr for foreigners.

In terms of what you can purchase with your SRS account, you can purchase all sorts of financial assets from stocks, unit trust, even robo advisors, insurance savings plans, annuities.

Hedging that Withdrawal Age Risk

I never felt the need to open an SRS account because due to my income level, and the tax relief that I had in the past, the tax that I eventually pay is a very small percentage of my total income.

However, recently, I started to get very uneasy with the number of articles in the mainstream publications, and on TV regarding working longer, discussion on retirement and the retirement age.

I got a freaking feeling that they will extend the statutory retirement age.

When that happens, so will the penalty free SRS withdrawal age.

So why not spend $1 to fixed that penalty withdrawal age?

I did some research, and seems that, I cannot find any noticeable difference in the offering of UOB, OCBC and DBS.

So I just go with the easiest option which is to open an SRS account with DBS.

It is easiest because opening a lot of accounts with DBS is just a few clicking process.

opening SRS account 1

If you navigate accordingly, and follow the instructions, all it takes is transfer $1 to open it.

I didn’t even bother that opening an account and transferring money will net you cash reward. However, if you are interested in these stuff, here it is.

Update: I think a fair number of readers was asking wouldn’t the statutory retirement age of 62 years old be shifted.

If we take reference from Ministry of Finance SRS document, I don’t think it will:

SRS Statutory Retirement Age 1

SRS Statutory Retirement Age 2

The above points was taken from the SRS document. Observe that a lot of the variables take reference from the statutory retirement age when you make your first SRS contribution.

Thinking Deeper about SRS and Paying Taxes

At first, I just want to ensure that I can lock in that penalty free withdrawal age, just in case I need it.

However, I thought about it, and I decide to do some quick calculation on my projected income tax for next year.

And then I realize maybe I should contribute to my SRS account.

When mom passed away, I lost some large tax deduction.

When I ROD last year, I lost some small tax deduction.

My tax deduction is damn bare.

That, together with higher total income, would mean that my taxable income will result in a big increase of my income tax expense.

So SRS became a viable consideration.

I really, really, really, really don’t like to have my money locked up. So that means no CPF SA top ups and previously no SRS contribution.

Between the two of them, the SRS contribution is perhaps the lesser evil.

This is because you can withdraw SRS early and pay the 5% penalty but you cannot do that with your CPF.

I compute that there is a possibility that I could be unemployed in the future, and take an early withdrawal, and I won’t be taxed at an ordinary income level. The difference between the 5% penalty and my marginal income tax bracket is still worth it.

But in the end, in the grand scheme of things, perhaps I should just pay the increase in tax and be done with it.

I forecast this will be my highest total income I will have for some time, so perhaps this will be the last time I will pay at such an income bracket.

I am not going to make a big deal out of it as I am fortunate I can pay a higher tax, because it would mean I earned more, while there are others who struggled to get employed.

The SRS is a bit Broken

I shall not go deep into it but while mathematically, we can say the tax deference and tax deduction works in our favor, you lose a lot of the optionality of your wealth.

One of the main reasons its broken is because relatively speaking, our ordinary taxes paid is relatively low, versus other countries.

In other countries, the effective taxes paid could be 20% upwards of your total income.

Unlike other countries, on a personal basis, we do not have

  1. long term equity capital gains taxes
  2. short term equity capital gains taxes
  3. taxes on dividends (unless from a partnership)
  4. taxes on interest income (unless from a partnership)

What this means is that if we build wealth through our normal cash, brokerage and investment accounts, there is not tax penalty to it.

We thus do not need to make use of private deferred contribution accounts such as the SRS to optimize our taxes. For example, in USA, there are taxes on capital gains and dividends, thus optimization with traditional IRA, Roth IRA, 529, 401k, HSA and Roth 401k accounts is a must. Some of these accounts will lock your money till 59.5 years old. There is a whole discipline of Roth conversion ladders and contribution optimization that a wealth builder have to contend with.

Overall, we are already paying very low taxes relative to the net worth.

This is advantageous to individual and families that are financially unfettered and conscientious.

If we look at the impact of the tax savings on three different group of people, the lower income, middle income and higher income:

  1. if the lower income contributes to SRS, it will take up a large proportion of their annual income. It is a challenging way to save money and likely they won’t have that high of a tax burden as well
  2. the high income can contribute to SRS, and enjoy the tax savings. However, in the grand scheme of things, the tax savings during withdrawal versus after tax withdrawal will be rather minute versus their net worth
  3. the middle income would enjoy this the most, but a lot will depend on the rate of return of the SRS portfolio, and your current tax bracket. I haven’t done the math, but in the grand scheme of things, it might matter much less than we think

If you have contributed or choose not to contribute to the SRS, do let me know your thought process and whether you have a different take on my personal situation.

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Ht

Tuesday 5th of March 2019

Can we do it via ocbc srs Application ? No difference right ?

Aud

Sunday 23rd of December 2018

Hi Kyith

It seems like there's a fall below fee of S$50 per month charged quarterly if your DBS SRS account has got less than S$200,000 in Deposits &/or Investments as your Month End Balance, unless I'm reading their T&Cs wrongly?

Kyith

Sunday 23rd of December 2018

Hi Aud,

It should not be so high. I understand the charges are waived. there are very little people with that amount in their SRS!

Sinkie

Friday 14th of December 2018

For those who haven't hit BHS, can also lower income tax by voluntary top up to Medisave.

SRS more useful for those earning annual $100K to maybe $250K. i.e. middle to upper middle income. Especially if no parenthood tax rebate or other large deductibles.

For higher income, let's say chargeable income of $400K --- maxing out SRS will only bring down income tax from $62,150 to $58,784. A drop of only 5.4% while his marginal tax bracket is already 22%.

And as you pointed out, such high income people will have much larger cash assets as compared to the relatively small SRS amounts.

Anyway most people leave SRS as cash or low interest FDs. Maybe some insurance endowment. The main purpose is merely to reduce immediate income taxes and just leave as long term cash savings.

But for your case, SRS may still be useful especially if you already have large portion of cash / safe bonds. Treat the SRS as warchest for stocks & long term holdings. You can rely on cash assets for nearer term liquidity needs.

As for official retirement age, S'pore is different from other countries with pensions as their pension start date ties in with the retirement age. CPF Withdrawal Age and CPF Drawdown Age both don't depend on retirement age.

I think S'pore will prefer to retain the retirement age at 62 --- it's more business friendly as it is cheaper to let go or retrench people after retirement age than before it --- less expectation of retrenchment package --- the "iron or aluminium handshake" specified in the Re-employment Act if not re-employed is much smaller than typical retrenchment packages.

S'pore already using tools like Re-employment Act to promote working longer. The CPF Drawdown Age will likely converge to the re-employability age which is currently 67.

In practical terms, the retirement age in S'pore is superfluous. If money no enough, also cannot stop working. There's also no state pension or unemployment benefits, so no difference if jobless before or after retirement age.

Kyith

Friday 14th of December 2018

Hi Sinkie, thanks for providing that perspective. I didn't think of the retirement age in that way, but too much noise have made me wary and I believe there might be some changes in the near future. But i like your last sentence. Retirement age in Singapore is superfluous.

Jack

Friday 14th of December 2018

Just a question on fixing the statutory retirement. Would that follow any increases in statutory retirement as change by legislation? i.e. like a moving goalpost? Or would that be really fixed by that $1 example u mentioned? SRS would be a lil bit more attractive if it fixed. I dont like my money locked up as well

Kyith

Friday 14th of December 2018

Hi Jack, i think we can take reference from some of the documents published by Ministry of Finance on SRS > https://www.mof.gov.sg/Portals/0/MOF%20For/Individuals/SRS/SRS_Booklet%20-%2018Feb11.pdf

(* The statutory retirement age that was prevailing when you made your first SRS contribution.)

While it is not always concrete I think that is what they take reference from.

Jas

Friday 14th of December 2018

Hi Kyith, if the retirement age is increase, wouldnt it apply to all SRS accounts whether it's opened earlier or later?

Kyith

Friday 14th of December 2018

Hi Jas, i think we can take reference from some of the documents published by Ministry of Finance on SRS > https://www.mof.gov.sg/Portals/0/MOF%20For/Individuals/SRS/SRS_Booklet%20-%2018Feb11.pdf

(* The statutory retirement age that was prevailing when you made your first SRS contribution.)

While it is not always concrete I think that is what they take reference from.

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