Supplementary Retirement Scheme - logic

[epigram]

Hello,

I have a question if this makes any sense.

Say your tax rate is 5%. If you contribute $1000 to SRS, you save $50 in tax on the contributed amount.

If you do nothing and the $1000 remains static at retirement, (ignoring inflation/interest etc.), you get $1000 out - $500 tax free and $500 taxable. Assuming your tax rate by then 0%, you pay $0 in tax. So you saved $50.

Would this then mean that if you invest the $1000 in SRS, even if you lose 5% of the principal, you are in the same position as if you never contributed? Because if you didn't contribute, you would have paid $50, and have $950 left. So there is a already a 5% buffer in case your investment goes bad?

 

[limster]

If you do nothing and the $1000 remains static at retirement, (ignoring inflation/interest etc.), you get $1000 out - $500 tax free and $500 taxable. Assuming your tax rate by then 0%, you pay $0 in tax. So you saved $50.

In a sense you save $50 in return for a 20, 30 year 'lock-in' period.

I only opened an SRS account after my income hit a certain level.

 

[kokjj87]

If make more than 80k can start to contribute lo....

 

[Utonian]

i think this is not comparing things on the same level..

you are right to say you save $50 on the first year due to tax... and you would be right if you let the 1000 sit idle till you draw down at 0% tax level.. But who would do this....

in the alternate mentioned where you invest the funds, once you are invested, everything is subjected to market forces.. I cannot foresee someone saying i have lost the $50 "tax gain" so i shall liquidate the investment and hold on the $950 for the rest of the period till drawdown and say i lost nothing in principal...

 

[epigram]

What I'm trying to say is that if a sum is invested outside of SRS, you would start from a -22% position which you then have to work up from.

Whereas if a sum is invested within SRS, you start from a -11% to 0% position, recognising the trade off for the 11% safety net is a lock in for 30 to 40 years.

Does that make more sense? Thanks in advance

 

[dork32]

Hello,

I have a question if this makes any sense.

Say your tax rate is 5%. If you contribute $1000 to SRS, you save $50 in tax on the contributed amount.

If you do nothing and the $1000 remains static at retirement, (ignoring inflation/interest etc.), you get $1000 out - $500 tax free and $500 taxable. Assuming your tax rate by then 0%, you pay $0 in tax. So you saved $50.

Would this then mean that if you invest the $1000 in SRS, even if you lose 5% of the principal, you are in the same position as if you never contributed? Because if you didn't contribute, you would have paid $50, and have $950 left. So there is a already a 5% buffer in case your investment goes bad?

u made it sound like the tax saving is small and insignificant.

lets put it this way, let say i want to buy a single premium plan for 15 years today.

i buy with cash, i pay the full amount. i put inside srs then use srs to buy, i get the same thing, but i get to run tax. so why not?

you used 5% which belittles the savings. many of the srs people pay 7,11 or 15%

 

[Okenba]

What I'm trying to say is that if a sum is invested outside of SRS, you would start from a -22% position which you then have to work up from.

Whereas if a sum is invested within SRS, you start from a -11% to 0% position, recognising the trade off for the 11% safety net is a lock in for 30 to 40 years.

Does that make more sense? Thanks in advance

Yes. Basically, if you are in the 11% tax bracket, you can either:
A) Put 15.3k in SRS and invest from there.
B) Put (15,300 - 1,683 income tax) = 13,617 into investments.

Essentially, SRS gives you an immediate 11%+ gain.
The trade-off, as you mentioned, is liquidity, and also the restrictions of investments for SRS.

 

[Laneige]

Camp in because I was told to put money in so I just blur blur put in
Now can do what? I think I put in 11k or something

 

[epigram]

Yes. Basically, if you are in the 11% tax bracket, you can either:
A) Put 15.3k in SRS and invest from there.
B) Put (15,300 - 1,683 income tax) = 13,617 into investments.

Essentially, SRS gives you an immediate 11%+ gain.
The trade-off, as you mentioned, is liquidity, and also the restrictions of investments for SRS.

that's what i thought. the tax savings is the "gain" on the investment - which serves as a safety in case the investment goes south. if the loss on the investment is less than the tax savings, then you are still ahead - subject to the loss of liquidity / restrictions, etc.

 

[undiscern]

SRS is for those in 15% and above bracket.

 

[epigram]

SRS is for those in 15% and above bracket.

so <15% no point?

 

[Guojing88]

so <15% no point?

That really depends on individual, for me paying a marginal tax rate of 11% is very zzz so for me that tax rate is enough to make me contribute to SRS.

 

[twinklingstars]

I only put in a dollar to lock in the withdrawal age first, will probably make use of SRS in my 40s when I hit the next income tax bracket.

 

[mcylo]

Sorry noob here. How do u arrived at the magical number $15.3k?

Yes. Basically, if you are in the 11% tax bracket, you can either:
A) Put 15.3k in SRS and invest from there.
B) Put (15,300 - 1,683 income tax) = 13,617 into investments.

Essentially, SRS gives you an immediate 11%+ gain.
The trade-off, as you mentioned, is liquidity, and also the restrictions of investments for SRS.

 

[reddevil0728]

Sorry noob here. How do u arrived at the magical number $15.3k?

that's the cap per year

 

[chiokcc]

Sorry noob here. How do u arrived at the magical number $15.3k?

https://www.mof.gov.sg/mof-for/individuals/Supplementary-Retirement-Scheme-SRS

From 1 January 2016, the annual SRS contribution cap will be increased to:

(i) $15,300 for Singapore Citizens and Permanent Residents; and (ii)$35,700 for foreigners.

More information can be found in Q12 of the SRS Booklet (word)(pdf).

 

[epigram]

I only put in a dollar to lock in the withdrawal age first, will probably make use of SRS in my 40s when I hit the next income tax bracket.

great tip to lock in retirement age, since it will move up in 2023. i just did the same - $1 to lock it in.