How to use SRS for tax relief: A comprehensive guide

What is the Supplementary Retirement Scheme (SRS)?

The SRS in Singapore is a voluntary scheme which encourages you to save for retirement beyond your CPF savings.

It has the following features:

• Contributions to SRS are eligible for tax relief
• You can invest using the funds in SRS
• Investment returns are tax-free before withdrawal
• Only 50% of withdrawals from SRS are taxable at retirement
• The maximum withdrawal period is 10 years

The maximum SRS contribution each year you can contribute is $15,300 for Singapore Citizens/PR and $35,700 for foreigners. 

What is the SRS interest rate?

Unlike funds in your CPF ordinary account that earn an interest rate of 2.5% per annum currently, funds in the SRS account earn an interest rate of 0.05% per annum. 

Why you may consider a SRS top-up

#1 - Helps with retirement planning 

I see SRS as a tool to help my retirement plan. SRS helps me in two main ways – 

• Saves money which would otherwise be paid in taxes 
• Forces me to put aside a sum of money and use them for investment (otherwise the interest rate will be a just 0.05% per annum)

If you lack discipline like me, you should consider making SRS contributions and using them for investment purposes.

At least you will not be tempted to look at the stock market every night.

A lot of us say we are investing for the long term but some of us always panic whenever the market drops.

Putting in SRS helps because you cannot take out your money earlier without incurring penalties.

This forces me to put my money in until the statutory retirement age.

#2 - You get to enjoy tax relief

Let’s be honest - nobody enjoys paying taxes.

We should be responsible adults and take adequate measures to enjoy the personal income tax relief that is made available to us.

One way is through SRS. 

For example, you can contribute $10,000 to SRS and get relief of $10,000 when assessing your taxable income. 

(PS. Please note that for each Year of Assessment, there is a personal income tax relief cap of $80,000) 

Now, let us assume that we are contributing $10,000 each year. 

Let me show you how many taxes you are saving. 

The numbers may not look significant now but let’s put things into perspective. 

Assume we will work 30 years in our lifetime and the average tax bracket we end up in is “More than $80,000 and less than $120,000”. 

If we contribute to SRS yearly, we will save about …

$1,150*30 = $34,500.

This could easily be a downpayment (or half, thanks to inflation) for an HDB. 

The savings alone is already a huge win factor for me.

Why you may consider against a SRS top-up

Note that SRS is ultimately meant for retirement. There are penalties if you were to withdraw before the retirement age.

Early withdrawals are fully subject to tax and will incur a 5% penalty. 

Of course, there will be no penalties if you withdraw on reasonable reasons such as medical grounds, terminal illness and bankruptcy. 

You can refer to this link for more information. 

What can you invest in using your SRS funds?

Unlike CPF, there are more investment options you can consider using your SRS funds, including the following:

• Singapore Savings Bonds
• T-bills and SGS Securities
• SGD fixed deposits
• ETFs 
• Blue chip shares
• Unit trusts
• Endowment insurance plans

If you put in S$10,000 per year over 30 years, you will save about $300,000 as capital.

Assuming that your investment earns about 4% each year over the long term, you will earn about $283,000 in interest.

In total, you will have about $583,000 sitting in your SRS when you retire.

1M65? Not impossible!

This is the power of compounding, and of course discipline.

PS. Please note that 4% is a rough figure and reality may differ from my assumption. 

How do I perform SRS withdrawals at withdrawal age without paying taxes?

Personally, I am putting aside $7,000 each year into SRS and using it for investment.

The long-term expected return I hope to achieve is 4%.

By the end of 30 years, I will have about $408,000 in my SRS account.

Now, let’s figure out the taxable income part. 

To reiterate, 50% of withdrawals from SRS are taxed.

However, we know that we are only required to pay taxes on the first $20,000 of our income.

So, we can withdraw up to $40,000 each year tax-free.

Assuming I have no other urgent needs, I will withdraw $40,000 each year from SRS tax-free!

Assuming I have $408,000 by end of 30 years, I can safely withdraw my SRS money (tax-free) over the maximum period of 10 years and need not worry about my children not giving me money.

(P.S. the last $8,000, in excess of $400,000, is still taxable)

To summarize, the playbook is to put aside $7,000 into SRS each year and invest, then withdraw $40,000 each year after I reach retirement age.

What would Beansprout do? 

The SRS is just one of the many tools you can use for your retirement planning. 

When you top up your SRS, you will be able to earn a tax relief. However, we would consider investing using our SRS funds to be able to earn a potentially higher return. 

Some of the popular SRS investing options include ETFs, Singapore REITs, and T-bills. 

We can also explore other ways to help with our retirement planning, including a CPF SA transfer from OA, or a CPF SA cash top-up.