29 Jul 2016 
SOURCE: Heartland Boy

Unlike the previous recommendations by Heartland Boy, namely,

this recommendation of utilizing the SRS Account  requires a little bit more effort. This is because this is a voluntary scheme and not a compulsory scheme such as the CPF. One has to first apply for a SRS Account with any of the 3 authorised local banks – DBS, UOB or OCBC. Nonetheless, Heartland Boy assures you that this little effort is worth your time as the SRS Account is not just a useful tool to boost your retirement planning, but also a valuable tool to minimize your tax expenses.

In all honesty, it is not easy to explain the workings of the SRS Account in a single article. In essence, Heartland Boy thinks that it has 3 sequential mechanisms:

Contribute, Invest, Withdraw

  • After opening the SRS Account, if the account holder is a Singaporean, he or she can contribute cash into it but the contribution is capped at a maximum of S$15,300 per annum.
  • This contribution earns 0.05% per annum. However, account holders who have a more aggressive risk profile can invest the contribution into higher yielding financial products such as fixed deposits, stocks and unit trusts etc. Naturally, all sale proceeds from the financial products must be returned to the account.
  • Upon age 62, the account holder can start to withdraw the money from his SRS Account over a 10-year period to tide him over his golden years. However, do note that 50% of the funds withdrawn upon retirement would be subject to income tax. For example, if $S50K is withdrawn, only S$25K will be added to your chargeable income for that assessment year.

SRS ACCOUNT TO BOOST RETIREMENT PLANNING.jpg Diagram 1: Flow Chart of how the SRS Account works


For obvious reasons, the greatest advantage of the SRS Account is that it reduces income tax expense. Every dollar deposited into your account reduces your taxable income by a dollar.  For instance, you save S$ 1,553 in income tax (11.5% X S$15,300) if your assessable income falls under that tax bracket.

If you withdraw your funds before reaching age 62, 100% of the funds withdrawn will be subject to income tax. This will effectively negate all the tax relief that you have enjoyed earlier, ceteris paribus. In addition, a 5% penalty is also levied for such premature withdrawals. Therefore, readers should look to set aside an emergency fund first before looking to contribute to their SRS Accounts.

Some people may still baulk at the fact that 50% of the funds withdrawn after age 62 would still be subject to income tax. However, it is actually possible to achieve a scenario whereby none of your withdrawals is taxed. Assuming you are retired and have no income from employment by age 62, you will not pay any income tax if you keep your yearly withdrawal within the non-taxable bracket of S$20K. Therefore, it is possible to accumulate up to S$400K in your account by age 62, and start withdrawing S$40K per annum over 10 years. This scenario is illustrated in the diagram below. 

SRS ACCOUNT TO BOOST RETIREMENT PLANNING1.jpgDiagram 2: Withdrawal from SRS Account with NO Income Tax Paid

Theoretically, this S$400K can be an even bigger sum depending on the tax relief circumstances for that year. For instance, the scenario illustrated above does not take into account spouse relief, qualifying child relief etc.

Heartland Boy opened his SRS Account last year after he read about it on financial websites. It was a super fuss free event as his application was approved online via DBS Internet Banking. He then proceeded to contribute the money by transferring the money from his DBS Account. He subsequently enjoyed dollar for dollar tax relief this year.

SRS ACCOUNT TO BOOST RETIREMENT PLANNING2.pngDiagram 3: Heartland Boy enjoyed tax relief from his SRS Account

In addition, he proceeded to link his DBS Vickers trading account with his SRS Account. This allowed Heartland Boy to use the contribution to invest into STI ETF. He made the investment in January this year when STI plummeted to 2700 points. This investment is currently sitting on gains of 11%.  After witnessing the success of Heartland Boy's SRS journey, an envious Heartland Girl decided to open her own account too!

Young adults should definitely view the SRS Account as a complementary pillar in their retirement plans. Indeed, it may not be a bad idea to swallow the bitter pill now and set aside some cash annually to grow it.

*All information is accurate as at time of writing.

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