There is a 5% penalty if you withdraw SRS before 62 and the amount will be taxable.
But I believe that I will only need to touch the money before 62 if I lost my job, ie no income to tax. My current tax bracket is more than 5% so there is still some tax savings for me if I need to withdraw.
There are a couple important caveats. First of all, you probably have to wait until the next January to make a premature SRS withdrawal and avoid ordinary income tax on the full amount. It depends on when the hypothetical income interruption occurs, but the fundamental point is that income taxes are assessed on a calendar year basis. And then, if you find a new job in February after making a premature SRS withdrawal in January, this SRS gambit didn’t work. (And it’s a good thing you found a new job.) Second, the maximum amount of 5% penalty tax rate premature withdrawal from a SRS account, with no other income tax, is $20,000, not $40,000 like it is for a qualified withdrawal.
If you contribute to SA, you can only withdraw at 55 if you opt for FRS or ERS.
No, not for a single SA top up or even several. SA top ups effectively raise the BRS, but they don’t necessarily raise it up to the FRS. It depends on the timing and amount of SA top ups.
I don’t think it makes any sense to reduce a Retirement Account below the FRS. Rather the opposite, actually. Whatever planet the CPF LIFE income stream associated with below-the-FRS is, it definitely ain’t high cost of living Singapore. It’s definitely not luxury living on a sub-FRS CPF LIFE income, so I don’t know why so many people feel it’s so critically important to be a super poor 65+ year old instead of a merely poor one, because that’s what we’re talking about here. So I don’t rank this consideration very high at all. However, if you do, why not a MA top up? You’re probably going to fill MediSave anyway, and the faster you fill it, the more interest you earn and the faster SA fills up with funds that can be withdrawn at age 55+ if you insist. MA voluntary contributions also qualify for tax relief (with no $7,000 limit), bonus interest, and can be useful at any/every age. MA VCs must fit within both the CPF Annual Limit and Basic Healthcare Sum.
However, if I am in my 20s, i.e your painted scenario, my focus will be to build up my liquid funds instead of locking it for decades, as at this stage, one will need cash to build up a family. But maybe others will have a different opinion
I do. Liquidity is overrated. You need enough of it, not more than enough of it. I don’t see people recommending avoiding HDB flats because they’re liquidity constrained (they are), so why the special pleading for CPF? OK, so there’s a liquidity constraint. Take note of it, factor it into your decision, then proceed if you would still have adequate liquidity, that’s all. The interesting thing about MA is that it’s liquid for lots of medical stuff, and not just your own medical stuff.
but the penalty of 5% is on the entire sum? whereas your tax bracket is more like marginal? i assume more than 5% i.e. 7% right? cause there is no 5% tax bracket.
Good point! Be careful drawing comparisons between average and marginal tax rates. They’re not directly comparable.
The 5% penalty will be on your withdrawal sum, not your entire SRS.
One more important point is that the 5% penalty is not set in stone. It could be 10% any time the government wishes it to be. A lot of people seem to think CPF is unique in being subject to rule changes, but no, not so. The government can change the rules on pretty much anything at any time.
Yes , I have read your considerations. Actually, SRS and SA top ups to me are tax savings tools, not investment tools. Hence, I do not use SRS to buy stocks etc as I do not want to pay tax on my capital gains, Mainly use for endowment funds to enjoy tax savings while earning stable returns.
OK, but that’s not a 4% (or even 5% with bonus interest) near guaranteed interest rate, is it? These days the guaranteed endowment plans are sub-2%. I don’t think you should starve yourself, metaphorically, because you might also starve IRAS a little. Just construct your desired long-term portfolio, then decide which vehicles handle which parts. If that means you’ve got 15% in MBH (for example), and your SRS can hold 2/3rds of your MBH allocation, fine. That doesn’t mean you should choose endowment plans unless you ordinarily would choose them as part of your long-term investment strategy. And I don’t think you would or should.
I am also mindful that only $20k is tax free (so $40k for SRS) and I may have other income post 62. I do not think $40k is enough for my retirement income as there may be rising health costs at that age.
That’s right, so if you expect difficulty maximizing tax free or at least tax favored SRS withdrawals, that’s another reason why MA and SA could be more attractive tax relief opportunities.
disclaimer, i am not a supporter of CPF after introduction of min sum.
That was a very long time ago, so long ago that the Minimum Sum doesn’t exist any more. We now have BRS/FRS/ERS.
And here’s where I don’t understand your “logic.” The government can change the SRS rules too any time it wishes. Why is CPF bad but SRS good in those terms? It doesn’t make sense. If anything the rule-based calculus ought to favor CPF slightly. That’s because CPF has far more participants (who vote) compared to SRS.
