SRS - any penalty?

[gracehsu]

Uh, it’s not stuck earning 0.05% interest. He can use SRS dollars to buy Singapore Government Securities for example. The next 12 month T-bill (for example) will be auctioned next month (January).

For late career income shifting SRS accounts can work rather well, actually.

Now that you added this new dimension of using SRS for investment (I like the idea of T-bills), my earlier conclusion that “SRS is not useful for young pple” may not be correct.

Example .. 30yo wif tax bracket of say 19% - do you think it make sense to SRS?

In my mind, it still doesn’t make sense to have your money stuck in SRS for 33 years (altho can withdraw albeit wif penalty etc) . Might as well keep as cash and can invest freely. Is my thinking correct ah?

Just read first 2 posts is good enough can start already. Next week got one auction

Good tips hehehe… I read up abit on T-bills liao so have this question. Is T-bills a very low risk investment? (i.e. similar as FD)

 

[BBCWatcher]

Example .. 30yo wif tax bracket of say 19% - do you think it make sense to SRS?

Maybe. “More information required.”

In my mind, it still doesn’t make sense to have your money stuck in SRS for 33 years (altho can withdraw albeit wif penalty etc) . Might as well keep as cash and can invest freely. Is my thinking correct ah?

Not really, no. If you’re 30, planning to die very soon (have a terminal illness for example), and have no heirs you care about then an account with a withdrawal penalty prior to age 63 isn’t so attractive. But many people can reasonably accept a 33+ year hold in exchange for some reward. There is a reward offered with SRS accounts: (likely) tax relief in Singapore.

These arguments puzzle me. For example, parents invest in their child’s education. That’s an investment with lifetime payoffs (likely, but not certain). Can people plan 33+ years ahead? Sure they can! Most people know there’s a very high likelihood they’ll be older, retired versions of themselves.

I think I opened a retirement savings account (in another country) about 39 years before minimum withdrawal age. No problem! It was/is a good deal.

Good tips hehehe… I read up abit on T-bills liao so have this question. Is T-bills a very low risk investment? (i.e. similar as FD)

T-bills are lower risk vehicles than fixed deposits. Singapore T-bills are direct, general debt obligations of the Government of Singapore, backed by its full faith and credit. There’s nothing safer available for Singapore dollars.

 

[revhappy]

SRS accounts also don’t work well if you make spectacular investment gains. Let’s suppose you contribute $1,000 in the 22% tax bracket, so you save $220 in income tax. Then the $1,000 mushrooms to $1,000,000. Ooops. You’re going to pay a lot more than $220 in income tax (even in net present value terms) on withdrawals from a $1,000,000 SRS account.

This is rare, of course, but this is why SRS dollars often languish in the cooler parts of overall investment portfolios.

This is not correct. @celtosaxon has done the right calculations. You must take into account the fact the you also saved tax and that also should be invested in the same instrument which went up 1000 times. So net net you make exactly the difference in your current tax bracket v/s the future tax bracket.

We did this calculation from a foreigner perspective and it is not really that attractive, but for locals who can withdraw during retirement while being tax resident and very little Income, it is a great deal.

 

[BBCWatcher]

This is not correct. @celtosaxon has done the right calculations. You must take into account the fact the you also saved tax and that also should be invested in the same instrument which went up 1000 times. So net net you make exactly the difference in your current tax bracket v/s the future tax bracket.

This argument presupposes that all tax savings are invested in the same portfolio allocation with the same returns. I don’t think that’s a realistic assumption. Real humans don’t seem to do that, and the structure of the SRS accounts encourages them not to after they’ve made their contributions. Realistically you place your riskier investment bets outside the SRS account and more conservative ones inside.

”In the old days” when your only realistic choice for long-term investing was whatever your uncle’s cousin sold from the life insurance company then I think this argument made some sense. Not any more. I think it makes sense to weight this factor to some degree in assessing the overall characteristics of the SRS account. It doesn’t necessarily mean you shouldn’t contribute to a SRS account, but it’s a factor.

There’s also the fact that a SRS account is hived off and cannot be easily rebalanced with other assets, plus there are added transaction costs. So even if you agree with the government’s argument about average portfolio returns there are still operational speedbumps.

 

[gracehsu]

This is not correct. @celtosaxon has done the right calculations. You must take into account the fact the you also saved tax and that also should be invested in the same instrument which went up 1000 times. So net net you make exactly the difference in your current tax bracket v/s the future tax bracket.

We did this calculation from a foreigner perspective and it is not really that attractive, but for locals who can withdraw during retirement while being tax resident and very little Income, it is a great deal.

I think BBC is explaining to make it simple for newbie like me to understand.
Seems correct leh…
Save tax is saving on the SRS contribution ( which is the $1000 example) save $200

$1,000 SRS investment ballooned $1,000,000 (I wish but it’s rare hehehe) - capital gain is not taxable correct?

When you withdraw the ballooned SRS amount, 50% of SRS withdrawal will be deemed as income and subject to tax.. which is gonna be higher than the tax savings from SRS original contribution ..makes sense to me


So I search for Celtosaxon post and found a treasure cove .. @BBCWatcher fan club thread .. wah seh

 

[revhappy]

This argument presupposes that all tax savings are invested in the same portfolio allocation with the same returns. I don’t think that’s a realistic assumption. Real humans don’t seem to do that, and the structure of the SRS accounts encourages them not to after they’ve made their contributions. Realistically you place your riskier investment bets outside the SRS account and more conservative ones inside.

”In the old days” when your only realistic choice for long-term investing was whatever your uncle’s cousin sold from the life insurance company then I think this argument made some sense. Not any more. I think it makes sense to weight this factor to some degree in assessing the overall characteristics of the SRS account. It doesn’t necessarily mean you shouldn’t contribute to a SRS account, but it’s a factor.

There’s also the fact that a SRS account is hived off and cannot be easily rebalanced with other assets, plus there are added transaction costs. So even if you agree with the government’s argument about average portfolio returns there are still operational speedbumps.

You seem to be contradicting yourself here. One hand you say, "Realistically you place your riskier investment bets outside the SRS account and more conservative ones inside"

Then you also say "$1,000 SRS investment ballooned $1,000,000"

I would say now we have better investment options via SRS, like Endowus and I agree with you that real human behaviour is not so mechanical, but actually this works in SRS's favour. Human behaviour is such that when you know something is locked in and you cannot take it out, you kind of leave it alone and let it compound, v/s have the flexibility to do whatever you want, you are more likely to screw up.

So your scenario of 1000 going to 100000 is actually possible with SRS rather than outside SRS.

 

[s0crates]

Conceptually it's easy to agree with bbcw but whether his conclusions actually make sense to your own circumstances, or even the regular Singaporeans' circumstances is to be determined.

I have around 150k investable in CPF OA, another 50k investable in SRS and 300k investable in cash as someone in my mid 30s. Does it make sense for me to hold around 10% of my wealth (SRS) in lower risk option?

Maybe. But why should I if I committed to long term investment for SRS? And for cash I potentially may entertain thoughts of starting my own business and hence have a lower risk profile?

I rather take optimise by taking max risk for cpf and SRS while with cash I be slightly more conservative. Tax relief is just one factor to optimise for.

 

[BBCWatcher]

You seem to be contradicting yourself here. One hand you say, "Realistically you place your riskier investment bets outside the SRS account and more conservative ones inside"

Then you also say "$1,000 SRS investment ballooned $1,000,000"

I would say now we have better investment options via SRS, like Endowus and I agree with you that real human behaviour is not so mechanical, but actually this works in SRS's favour. Human behaviour is such that when you know something is locked in and you cannot take it out, you kind of leave it alone and let it compound, v/s have the flexibility to do whatever you want, you are more likely to screw up.

So your scenario of 1000 going to 100000 is actually possible with SRS rather than outside SRS.

Let me summarize:

1. SRS contributions may be sensible. If you think there's a high probability of decent or better tax savings then it's probably a good idea.

2. Once you've made a SRS contribution you're better off putting your expected lower yielding assets in the SRS account and using unrestricted cash for the higher yielding investments — consistent with your overall portfolio allocation. That's because SRS withdrawals are taxed on half the amount withdrawn, inclusive of gains/dividends/interest. (This is just further tax optimization.)

3. On the off chance your expected lower yielding assets turn out to be extraordinarily high yielding ones you could end up paying a surprisingly high amount of income tax upon withdrawal. (But see #1.)

 

[gracehsu]

Uh, it’s not stuck earning 0.05% interest. He can use SRS dollars to buy Singapore Government Securities for example. The next 12 month T-bill (for example) will be auctioned next month (January).

Thanks for highlighting managed to bid successfully for my dad (realized that he also SRS last year) so it’s about $30k which works out to be $600 for 6mths…. Not much but definitely much better than stuck in SRS acct

Just read first 2 posts is good enough can start already. Next week got one auction

Xie xie… So I was camping at the T-bills thread and picked up some basic knowledge

Bidded 4.2 for my dad’s SRS (successful)
Bidded 4.4 for myself cash $100k (unsuccessful but no regrets trying)

 

[di_andrei]

Thanks for highlighting managed to bid successfully for my dad (realized that he also SRS last year) so it’s about $30k which works out to be $600 for 6mths…. Not much but definitely much better than stuck in SRS acct


Xie xie… So I was camping at the T-bills thread and picked up some basic knowledge

Bidded 4.2 for my dad’s SRS (successful)
Bidded 4.4 for myself cash $100k (unsuccessful but no regrets trying)

Well done, nice to see someone asking questions, getting advice and then making the right decisions.

 

[DevilPlate]

All these free articles online make our lives much easier.

https://dollarsandsense.sg/10-investments-can-make-srs-account/

Personally, I would invest in higher risk/yielding instrument like local banks and Reits for SRS as it is sort of "Do not touch" portfolio and you are being forced to hold long term which is actually better than using cash due to itchy hand syndrome LOL.

 

[Value.Matrix]

You seem to be contradicting yourself here. One hand you say, "Realistically you place your riskier investment bets outside the SRS account and more conservative ones inside"

Then you also say "$1,000 SRS investment ballooned $1,000,000"

I would say now we have better investment options via SRS, like Endowus and I agree with you that real human behaviour is not so mechanical, but actually this works in SRS's favour. Human behaviour is such that when you know something is locked in and you cannot take it out, you kind of leave it alone and let it compound, v/s have the flexibility to do whatever you want, you are more likely to screw up.

So your scenario of 1000 going to 100000 is actually possible with SRS rather than outside SRS.

There is actually a scenario which (doesn't apply to bottom 80%) but applies to those with tax of at least 15% and above.

1) Whatever your tax savings is now, is cash that can be invested without differed tax
2) if you are paying 15% tax rate now, saving 15% now for a potential 22% tax rate in the future (but at halved, which makes it effective rate rate at 11%) is a pure benefit. You will contribute simply because your tax rate is halved, which is a no brainer. Any one who is good at maths would just contribute based on this.

There is no need to even do net future value. But I did a table, and this is the same (for confirmation). Which BBC did not highlight at all. And that is also not summarised in it.

 

[revhappy]

There is actually a scenario which (doesn't apply to bottom 80%) but applies to those with tax of at least 15% and above.

1) Whatever your tax savings is now, is cash that can be invested without differed tax
2) if you are paying 15% tax rate now, saving 15% now for a potential 22% tax rate in the future (but at halved, which makes it effective rate rate at 11%) is a pure benefit. You will contribute simply because your tax rate is halved, which is a no brainer. Any one who is good at maths would just contribute based on this.

There is no need to even do net future value. But I did a table, and this is the same (for confirmation). Which BBC did not highlight at all. And that is also not summarised in it.

You may want to recheck your math. Do some scenarios where the underlying has appreciated let's say just 100%.

Let's take example you contributed 10k and you save 15% on it which is 1500.

At withdrawal time, let's say the 10k became 20k. Even if the tax rate is same 15% but on 1/2 the amount you effectively pay 15% on 10k. So you pay 1500 in taxes. So no gain no loss.

But the initial 1500 you saved assuming that also goes up 100%, you make 1.5k net saving.

If the 10k goes to let's say 50k. You end up paying 15% on 25k which is 3.75k. So here you pay a net extra tax of 2.25k.

But the initial 1.5k you saved goes up 5 times so it become 7.5k, i.e you make 6k profit here, so net profit is 3.75k.

So to make SRS a success, the key is whatever amount you save initially in taxes should appreciate at the same or higher rate than what you put in SRS and also your SRS amount should appreciate atleast in the same way as it would have outside SRS.

 

[SDM1974]

Would it not be correct to only withdraw SRS after one stops working (no more income) so one falls under the minimum tax amount (currently 20K) even after accounting for the SRS withdrawal amount?

 

[reddevil0728]

Would it not be correct to only withdraw SRS after one stops working (no more income) so one falls under the minimum tax amount (currently 20K) even after accounting for the SRS withdrawal amount?

Employment income is not the only income that get taxed

 

[Nicholas92]

Random thought - although only 50% of SRS withdrawals are taxed, what if income tax rates rises over the next 35 year lol

 

[reddevil0728]

Random thought - although only 50% of SRS withdrawals are taxed, what if income tax rates rises over the next 35 year lol

precisely. that's why people shouldn't save tax for the sake of saving. and need to put more thoughts into contributing SRS

 

[Value.Matrix]

Random thought - although only 50% of SRS withdrawals are taxed, what if income tax rates rises over the next 35 year lol

It's a happy problem. But if you want to buffer, do it only when your tax rate is 15%. So even if its 30% at the highest tier, it makes sense.

 

[Value.Matrix]

You may want to recheck your math. Do some scenarios where the underlying has appreciated let's say just 100%.

Let's take example you contributed 10k and you save 15% on it which is 1500.

At withdrawal time, let's say the 10k became 20k. Even if the tax rate is same 15% but on 1/2 the amount you effectively pay 15% on 10k. So you pay 1500 in taxes. So no gain no loss.

But the initial 1500 you saved assuming that also goes up 100%, you make 1.5k net saving.

If the 10k goes to let's say 50k. You end up paying 15% on 25k which is 3.75k. So here you pay a net extra tax of 2.25k.

But the initial 1.5k you saved goes up 5 times so it become 7.5k, i.e you make 6k profit here, so net profit is 3.75k.

So to make SRS a success, the key is whatever amount you save initially in taxes should appreciate at the same or higher rate than what you put in SRS and also your SRS amount should appreciate atleast in the same way as it would have outside SRS.

Thanks for the edit.

Usually its the same if you are investing through endowus.

Or as others said, do a bond portfolio if you are so afraid to pay a bit of tax. But seriously, it's a happy problem.

Which is why I qualified to do it only when your tax rate is 15%

 

[revhappy]

It's a happy problem. But if you want to buffer, do it only when your tax rate is 15%. So even if its 30% at the highest tier, it makes sense.

Singapore is already is low income tax country and a zero capital gains tax country. So doing SRS is not really saving you a lot of tax. But you seem to ignore that SRS withdrawal tax is on the gains as well, even if it is 50%. So from no capital gains tax you end up paying capital gains tax.

I am not saying SRS is not useful. It could be useful for people who are withdrawing in retirement small amounts at 0 tax bracket.