Tuesday, 15 November 2016

Take Advantage of Supplementary Retirement Scheme (SRS) Account (Part Two)

There are many articles (see part one of my post on SRS) that identified the benefits of contributing to your SRS account. In this post, we will examine the amount of penalty for if you decide to withdraw your funds earlier than the statutory retirement age (currently 62).

Case Study 1
Max, aged 45, withdrew $30,000 from his SRS with a taxable income of $60,000: 


Total penalty = 5% early withdrawal penalty + 100% of withdrawn amount taxed at prevailing rates.


If we calculate, we will derive at $1,500 for early withdrawal penalty (5% of $30,000). As for taxable income of $90,000 ($60,000 original taxable income + $30,000 withdrawn), the total tax amount is $4,500. This is $2,550 higher than the original income tax of $1,950. Therefore, in total, Max paid a total of $4,050 ($1,500 penalty + $2,550 additional taxes) to withdraw $30,000 from his SRS account.



Case Study 2
Elisa, aged 54, withdrew $50,000 from her SRS with a taxable income of $90,000: 


Total penalty = 5% early withdrawal penalty + 100% of withdrawn amount taxed at prevailing rates.


If we calculate, we will derive at $2,500 for early withdrawal penalty (5% of $50,000). As for taxable income of $140,000 ($90,000 original taxable income + $50,000 withdrawn), the total tax amount is $10,950. This is $6,450 higher than the original income tax of $4,500. Therefore, in total, Elisa paid a total of $8,950 ($2,500 penalty + $6,450 additional taxes) to withdraw $50,000 from her SRS account.

To summarize: Please do not withdraw from your SRS account before the statutory retirement age and when you have high taxable income. When you are above statutory retirement age, you do not have to pay the 5% penalty on the withdrawn sum. Further, only 50% of the withdrawn amount are subjected to income tax. The penalties for withdrawing early from your SRS gets heavier when your taxable income is higher.

Case Study 3
To illustrate, let us take a look at James, aged 65, withdrew $50,000 from his SRS account with a taxable income of $0:


Total "penalty" = 0% early withdrawal penalty + 50% of withdrawn amount taxed at prevailing rates.


If we calculate, we will derive at $0 for early withdrawal penalty (0% of $50,000). As for taxable income of $25,000 ($0 original taxable income + 50% of $50,000 withdrawn), the total tax amount is $100. This is $100 higher than the original income tax of $0. Therefore, in total, James paid a total of $100 ($0 penalty + $100 additional taxes) to withdraw $50,000 from his SRS account.

Singaporeans have a 10 years penalty free period from the first withdrawal to withdraw any amount of cash, any amount of times (I got this information from the SRS booklet, please correct me if I am wrong). To reduce the taxes paid, it will be wise to split your withdrawals into 10 years and this will further supplement your retirement income.


Overall, the SRS is a great retirement tool for many Singaporeans. However, the early withdrawal penalty and fees are rather exorbitant. If you have no doubt that you will not need the money before retirement, you should full advantage of your SRS now!

Best,
AT




No comments:

Post a Comment

About the author

My Photo

Financial freedom = Passive Income > Expenses. Always remember that there are two sides to the equation of financial freedom. Beside working on how to improve our passive income through investing, we should never neglect the expenses portion. By striving to improve both side of the equation, we can achieve our financial goals and win in the game of money.

I will also be sharing some interesting news and ideas related to investing and the stock market, you can find me on FacebookGoogle+ or Twitter