IRAS subsidy

[dork32]

Not necessary. If by contributing to SRS, it can bring your taxable income to the lower band, then it will be worthed.

Here is the example.

If after all the allowable deduction, your taxable income is $45,000.
If you do not contribute SRS, you will have to pay tax:
550 + 7% x (5,000) = $900

If you contibute full SRS (12,750), you are lowering your taxble income to $32,250. Hence your income tax fall into the lower band, hence you will only pay
200 + 3.5% x (2,250) = $278.75

Hence you save $621.25, which means 4.87% return


Actually the optimize SRS contribution in this case should be just $5,000
Hence you will only pay $550 tax instead of $900, while only contributing $5000
ROR = 350/5000 = 7%

Of course the higher your income band, the higher the return.

In my opinion, if you can't bring down your tax band by 1 level, not worth to contribute as the money will get lock up for long time... (unless if you are cash rich of course)

it does not matter whether you bring down your tax band by 1 or not.

counter example.
taxable income = 70 k
tax = 550 + 30k* 7% = 2650

with srs
tax = 550 + 18k * 7% = 1810
savings = 840 >621.

easier way of calculating is 12k * 7%

to me it is which band the last 12000 of salary falls into. if it is in the 3.5%, don't waste time. if it is in the 7%, consider. if it is 11.5% or more, then just put it in.

notice we did not consider the 30% rebate. so the savings is reduced by 30%

 

[lingua101]

it does not matter whether you bring down your tax band by 1 or not.

counter example.
taxable income = 70 k
tax = 550 + 30k* 7% = 2650

with srs
tax = 550 + 18k * 7% = 1810
savings = 840 >621.

easier way of calculating is 12k * 7%

to me it is which band the last 12000 of salary falls into. if it is in the 3.5%, don't waste time. if it is in the 7%, consider. if it is 11.5% or more, then just put it in.

yeah sorry.... a bit salah... my point is sometimes, may not necessary to put the MAX amount of SRS to enjoy the highest benefit. If it makes it fall to below the current tax, just conntribue to that band (no need 12,750).

but again only do it if you are cash rich lo.

 

[lzydata]

Actually i did read it, that "no difference" relies on some major assumptions like same income bracket. Srs booklet point 75 admits as much by dodging the question on tax of srs savings withdrawals.

I assume you are conceding that there is no difference in the treatment of capital gains between investing with cash and investing with SRS. The income bracket is a different matter.

"75. Why is the tax treatment of SRS withdrawals not changed even though locally-sourced investment income is now exempted from tax?

The current tax treatment of SRS withdrawals is already attractive. Only 50% of SRS withdrawals at/after retirement age are taxed. With careful planning, a retiree who is likely to have a low marginal tax rate, may end up paying little or no tax on his SRS withdrawals."

I think it is a very fair assumption that the tax rate at age 62 and beyond is the same or lower than during the contribution age. This is a retirement savings account. Why should a person start withdrawing from his SRS if he is (1) still working, and (2) earning big bucks? He does not have to withdraw on his 62nd birthday or any fixed date. Only when his income is low or nothing, then he should start withdrawing. If he is fortunate enough to never need the money, it can even become part of his estate.

Of course, it is possible that in 30 or 40 years' time Singapore will have very high income taxes and everyone cannot escape, even a retiree with no income besides SRS. But because only 50% of the amount withdrawn is taxable, income tax rates will have to rise significantly* in order to lose money by investing through SRS as opposed to cash. Even then, if one spreads out one's withdrawals over 10 years rather than withdrawing all in one shot - i.e. careful planning - the marginal rate each year will certainly be lower.

Since you think MOF's assumptions are unrealistic or they are dodging something, what are your assumptions? Illustrate a case where investing through SRS will not be worth it.

Nobody is saying that SRS is for everyone or you should put all your spare money into SRS. Obviously liquidity is important and especially those who want to buy a house or car cannot participate or participate too much. I don't see why you have to come up with bogus reasons to criticise SRS.

 

[icicic]

I assume you are conceding that there is no difference in the treatment of capital gains between investing with cash and investing with SRS. The income bracket is a different matter.



I think it is a very fair assumption that the tax rate at age 62 and beyond is the same or lower than during the contribution age. This is a retirement savings account. Why should a person start withdrawing from his SRS if he is (1) still working, and (2) earning big bucks? He does not have to withdraw on his 62nd birthday or any fixed date. Only when his income is low or nothing, then he should start withdrawing. If he is fortunate enough to never need the money, it can even become part of his estate.

Of course, it is possible that in 30 or 40 years' time Singapore will have very high income taxes and everyone cannot escape, even a retiree with no income besides SRS. But because only 50% of the amount withdrawn is taxable, income tax rates will have to rise significantly* in order to lose money by investing through SRS as opposed to cash. Even then, if one spreads out one's withdrawals over 10 years rather than withdrawing all in one shot - i.e. careful planning - the marginal rate each year will certainly be lower.

Since you think MOF's assumptions are unrealistic or they are dodging something, what are your assumptions? Illustrate a case where investing through SRS will not be worth it.

Nobody is saying that SRS is for everyone or you should put all your spare money into SRS. Obviously liquidity is important and especially those who want to buy a house or car cannot participate or participate too much. I don't see why you have to come up with bogus reasons to criticise SRS.

Sure assume investment amount 10k 10% bracket 40 year horizon and 5% ROE.

No SRS, 9k x 1.05^40 is about 63k.

With SRS 10k investing gets 70k.35k subject to tax so nett 66.5k is yours.

So yes Srs makes u better off but notice tax is now 3.5k, up from 1k so it's obvious that capital gains are being somewhat taxed else how come tax amt goes up.

Now i have an srs account but it is this part plus as you rightly pointed out lack of liquidity that limits my use of it. Your mileage may vary but there's no need to be condescending. I want to enjoy my retirement rather than dole out small amounts based on tax considerations

Btw i was in 0% bracket when i started but had some cash to invest from savings if you need a more concrete example - go ahead assume any non zero tax rate on withdrawal. And estate taxes aren't zero either but that's irrelevant as the tax would be on estate so no difference from cash.

 

[lingua101]

Sure assume investment amount 10k 10% bracket 40 year horizon and 5% ROE.

No SRS, 9k x 1.05^40 is about 63k.

With SRS 10k investing gets 70k.35k subject to tax so nett 66.5k is yours.

So yes Srs makes u better off but notice tax is now 3.5k, up from 1k so it's obvious that capital gains are being somewhat taxed else how come tax amt goes up.

well i think your comparison is not 100% complete.

you should also factor-in the tax savings that you get when you are contributing the SRS and project it to the future Of course this is rather complicated and also depend on which band they are in.


I guess we are all agree that SRS may not be for everyone. If you have some extra cash that you will save it up for retirement anyway, why not make us of this scheme?

I normally will only contribute some into SRS depending on my "liquidity" needs. Leat year, I only contribute $300

 

[icicic]

well i think your comparison is not 100% complete.

you should also factor-in the tax savings that you get when you are contributing the SRS and project it to the future Of course this is rather complicated and also depend on which band they are in.


I guess we are all agree that SRS may not be for everyone. If you have some extra cash that you will save it up for retirement anyway, why not make us of this scheme?

I normally will only contribute some into SRS depending on my "liquidity" needs. Leat year, I only contribute $300

Agreed! I'm not against srs and yes there are tax savings to be had. But just stand by my point that some of the capital gains are effectively taxed on withdrawal. Tax savings and capital gains taxes are not mutually exclusive Also maybe dividends if credit to the srs account but this I'm not sure. Cheers bro.

 

[lingua101]

Agreed! I'm not against srs and yes there are tax savings to be had. But just stand by my point that some of the capital gains are effectively taxed on withdrawal. Tax savings and capital gains taxes are not mutually exclusive Also maybe dividends if credit to the srs account but this I'm not sure. Cheers bro.

there is no capital gain tax in Singapore for now.

If what you referred as "capital gais" is the "increase" of the money (i.e. put $10,000 today and become $20,0000 in 20 years time, hence capital gain $10,000), you are right.

But again, you do not need to withdraw everything at the same time. Assuming there is no change of the tax regime, the firt $30,000 is taxable at 0%, and you have no active income at that time, so then wirthdraw $30,000 per year.. so you do not need to pay tax.

To me the biggest risk, as someone has written also, is the uncertainty of the tax regime. We make a BIG assumption that the income tax regime in Singapore will be more or less the same in 20-30 years time.

 

[lzydata]

Sure assume investment amount 10k 10% bracket 40 year horizon and 5% ROE.

No SRS, 9k x 1.05^40 is about 63k.

With SRS 10k investing gets 70k.35k subject to tax so nett 66.5k is yours.

So yes Srs makes u better off but notice tax is now 3.5k, up from 1k so it's obvious that capital gains are being somewhat taxed else how come tax amt goes up.

Now i have an srs account but it is this part plus as you rightly pointed out lack of liquidity that limits my use of it. Your mileage may vary but there's no need to be condescending. I want to enjoy my retirement rather than dole out small amounts based on tax considerations

Btw i was in 0% bracket when i started but had some cash to invest from savings if you need a more concrete example - go ahead assume any non zero tax rate on withdrawal. And estate taxes aren't zero either but that's irrelevant as the tax would be on estate so no difference from cash.

Singapore has had no estate tax since 2008.

The reason why the total tax paid is higher is obvious. By using SRS, one keeps more money to invest, and this money is allowed to compound. The money compounds enough so that even after the tax upon withdrawal you are still better off.

Looks like you insist on arguing that this must be a tax on capital gains by another name, and therefore it must be bad. And yet, even in your scenario, it turns out that this is a strange kind of tax that makes the taxpayer better off

I'm not trying to be condescending. We can argue about semantics and details, but the big picture is, you end up with more money by using SRS than not. I believe most people care more about how much money after taxes they have, rather than how much taxes they paid.

 

[icicic]

Singapore has had no estate tax since 2008.

The reason why the total tax paid is higher is obvious. By using SRS, one keeps more money to invest, and this money is allowed to compound. The money compounds enough so that even after the tax upon withdrawal you are still better off.

Looks like you insist on arguing that this must be a tax on capital gains by another name, and therefore it must be bad. And yet, even in your scenario, it turns out that this is a strange kind of tax that makes the taxpayer better off

I'm not trying to be condescending. We can argue about semantics and details, but the big picture is, you end up with more money by using SRS than not. I believe most people care more about how much money after taxes they have, rather than how much taxes they paid.

Not bad,just that i don't like it. Also don't ignore the whole starting out at 0% bracket part though yes that's just for the first contribution comparison. At later years when you move up in tax bracket definitely a good option if liquidity is not an issue.
Luck to all bro here in the journey towards self sustaining wealth! Huat ah.

Btw tx for info on estate tax, i always appreciate new learning.
Peace.

 

[lingua101]

I'm not trying to be condescending. We can argue about semantics and details, but the big picture is, you end up with more money by using SRS than not. I believe most people care more about how much money after taxes they have, rather than how much taxes they paid.

Well, although in general I agree with you. but again one must look into their liquidity needs.

Saving on the tax is should not be the prime reason for people to contribute into SRS in my opinion.

SRS is a great way to save for retirement fund as at the same time, you also get incentive from the reducing of income tax you paid.

Not the other way around. So only contribute when you have excess liquidity.

 

[1nd3x1nv3stor]

Sure assume investment amount 10k 10% bracket 40 year horizon and 5% ROE.

No SRS, 9k x 1.05^40 is about 63k.

With SRS 10k investing gets 70k.35k subject to tax so nett 66.5k is yours.

So yes Srs makes u better off but notice tax is now 3.5k, up from 1k so it's obvious that capital gains are being somewhat taxed else how come tax amt goes up.

No, your analysis in your example is not right. You are not comparing apple-to-apple.
You are comparing tax in "No SRS" scenario in year 0 vs tax in "With SRS" scenario in year 40.

In your No SRS, 9k x 1.05^40 is 63,360.
But remember your 1k that you paid for tax should become 1k x 1.05^40 as well, which is 7,040.

With SRS, 10k x 1.05^40 is 70,400. The 10% tax is exactly the same 7,040.

Exactly like lzydata said previously, it is the same.

Actually, this has been proven long time ago that investment pretax and after tax will generate the same result as long as the tax rate is the same.
Go google with "401k traditional vs roth" and you will find a lot of literatures on it.

In fact, our SRS is better, because using your simple example above, only half of 70,400 is taxable. Moreover (if nothing changes), the first 20,000 is not taxable. So only 15,200 is taxable. Using 10% in your example, you are paying $1,520 (vs $7,040 without SRS). If you stagger your withdrawal in 2 years, you pay 0 tax.

Hope this helps.

 

[icicic]

No, your analysis in your example is not right. You are not comparing apple-to-apple.
You are comparing tax in "No SRS" scenario in year 0 vs tax in "With SRS" scenario in year 40.

In your No SRS, 9k x 1.05^40 is 63,360.
But remember your 1k that you paid for tax should become 1k x 1.05^40 as well, which is 7,040.

With SRS, 10k x 1.05^40 is 70,400. The 10% tax is exactly the same 7,040.

Exactly like lzydata said previously, it is the same.

Actually, this has been proven long time ago that investment pretax and after tax will generate the same result as long as the tax rate is the same.
Go google with "401k traditional vs roth" and you will find a lot of literatures on it.

In fact, our SRS is better, because using your simple example above, only half of 70,400 is taxable. Moreover (if nothing changes), the first 20,000 is not taxable. So only 15,200 is taxable. Using 10% in your example, you are paying $1,520 (vs $7,040 without SRS). If you stagger your withdrawal in 2 years, you pay 0 tax.

Hope this helps.

Tx bro i try to wrap my simpleminded head around this one. Is that 1k x 1.05^40 considered the opportunity cost?

 

[1nd3x1nv3stor]

Tx bro i try to wrap my simpleminded head around this one. Is that 1k x 1.05^40 considered the opportunity cost?

Time value of money (TVM).
That $1,000 now = $7,040 40 years later if interest rate is 5%.

 

[lingua101]

Tx bro i try to wrap my simpleminded head around this one. Is that 1k x 1.05^40 considered the opportunity cost?

The 1K is the tax saving. What he said is exactly like what I said. You need to factor in the tax saving also and compound it to the future.

 

[dork32]

there is nothing wrong with icici calculations. it is quite good.

Only thing is the tax rate is wrong. our tax rate is 3.5, 7, 11.5, 15. It is quite unlikely to be at exactly 10%. Possible only if taxable income is 88000

Also it is very unlikely that the rate is 10% (same) upon withdrawal. It is likely to be lower. It could be 0 like what some forumers wrote. But even with his over-inflated tax rate during the withdrawal, it is more worth it if you contribute to srs.

 

[anfielder]

there is nothing wrong with icici calculations. it is quite good.

Only thing is the tax rate is wrong. our tax rate is 3.5, 7, 11.5, 15. It is quite unlikely to be at exactly 10%. Possible only if taxable income is 88000

Also it is very unlikely that the rate is 10% (same) upon withdrawal. It is likely to be lower. It could be 0 like what some forumers wrote. But even with his over-inflated tax rate during the withdrawal, it is more worth it if you contribute to srs.

I think he put 10% because that's the figure that MOF uses as an illustration.

 

[cash_boy]

I'm thinking of giving my mom allowance thru CPF, then my mom withdraw from there. Anyone think it's a good idea?

 

[mummy1234]

I'm thinking of giving my mom allowance thru CPF, then my mom withdraw from there. Anyone think it's a good idea?

Yes it is a good idea. You get tax relief. I used to do that too before I had my second child and the generous Parenthood tax rebate...

 

[subprimelive]

Yes it is a good idea. You get tax relief. I used to do that too before I had my second child and the generous Parenthood tax rebate...

to give parents allowance to their cpf, i need to know their cpf number? how do i apply? must parents be a certain age e.g. retirement age ?

 

[mummy1234]

to give parents allowance to their cpf, i need to know their cpf number? how do i apply? must parents be a certain age e.g. retirement age ?

I just went down to cpf office with a cheque to my mum's name. Need to know her IC no. I do not think they need to be of retirement age cause they just treat it as topping up of parents' cpf.