There have been a lot of questions from our clients lately about investing through SRS, the Supplementary Retirement Scheme. While there are a host of great articles that review the technical aspects, our clients want to understand how SRS may fit into their financial plan. The two main questions are:
- While used for Singapore income tax reduction, what are the other considerations I need to know when investing in SRS?
- Should I pay less tax now and commit to long term goals with SRS, or should I pay tax and have cash available for goals now?
Question 1 - Tax Reduction
Contributions to SRS are eligible for tax relief up to an annual cap of SGD 15,300 for Singaporeans and Permanent Residents, and up to SGD 35,700 for Foreigners. If your earned income places you in upper tax brackets, these reliefs can lower your tax considerably. The relief alone for a Singapore client could save upwards of SGD 3,366 on taxes a year.
The important consideration is that SRS saves income tax only. Investments in Singapore are not taxed on capital gains currently, so investing with an SRS account or investing with a normal brokerage account makes no difference on long term gains.
For Expats other than US taxpayers, you will want to consider what happens if you relocate. If you return home or relocate with an SRS account, you may have home country tax to pay on gains in the account after your relocation. Under the 10 year holding rule, you may close the SRS account 10 years after opening it and not pay the withdrawal fee. Remember that 50% of the withdrawal will still be subject to Singapore tax, and you may have tax in your home country.
For US taxpayers, SRS adds a great deal of complexity for taxes, investment choice, and limitations. SRS investment options are limited by regulation, and most providers will not accept U.S. clients on their platforms. If you do invest, this creates foreign tax reporting (IRS form 8621), possibly higher tax on gains and limited write-offs on loss. In many cases, the tax deduction from SRS may actually result in more US tax depending on your tax bracket. For a client in the 27% tax bracket, a 2% reduction in Singapore tax means a 2% increase in US tax as the bracket doesn't change but where the tax paid does.
Question 2 – Goals and Cash
While reducing income tax liability, once you invest in an SRS account there are minimum requirements for leaving your money. If you withdraw early you pay the tax that was relieved, plus an additional 5%. As this combined amount can be upwards of 27% in a penalty, it is a costly consideration.
What to do about the short-term? From a financial planning view, it is important to understand your cash needs on an annual basis. If you have restrictions on your budget, have a need for cash in the next few years for specific goals like property, or your savings capability is limited it may be best to not invest in SRS.
With these short-term considerations, it is best to check how much tax you will save. Saving on income tax is an advantage, but in certain instances, it may be better to pay tax now and have cash that is flexible and available for your financial planning goals.
SRS may have distinct tax advantages depending on your nationality and how it fits your financial plan. Many have benefited from taxes saved and the increased focus on retirement savings. Depending on your needs though, you may want to review contributions on an annual basis.