Personal tax planning 4 – bringing it all together

Tax planning considerations

Welcome to the final part of my basic personal income tax planning series! In this series of posts I hope to cover the following topics:

  1. Tax reliefs
  2. CPF Cash Top Up
  3. Supplementary Retirement Scheme (SRS)
  4. Bringing it all together – How to best utilise these reliefs to your advantage

In this part, I will cover the considerations and general strategy I use to mitigate my personal tax bill.

General Strategy

The general strategy for tax planning is as follows:

  1. Maximise your family support reliefs
  2. Once those are maxed out, consider if further tax mitigation is necessary using retirement support reliefs.

The reason for this is that family support reliefs are always there every year as long as you qualify. If you don’t claim the reliefs, it is wasted. As for retirement support reliefs, there are real downsides to using those reliefs as identified in part 2 & 3. This mainly due to the long lock-up periods and irreversible nature of contributions. As such, you should only use these reliefs if you are fine with the money being locked away and that you are in a high tax bracket.

Family Support Reliefs

1) Maximising your family support reliefs

As talked about in part 1, knowledge is important in maximising your family support reliefs. A quick recap of common reliefs that you should consider claiming:

Reliefs everyone should be claiming

*Note that Working Mother Child Relief and Grandparent Caregiver Relief is only available to women

As a side point, for married women with children, you should definitely at least claim the working mother child relief as this is the government’s most generous tax relief at the moment, whereby you can potentially claim up to 100% of your earned income (depending on the number of children you have and whether you hit the $80,000 personal relief cap).

2) Allocation of family support reliefs

Some of the family support reliefs can be shared with your siblings / spouse, as such there is some potential for tax planning. From a tax efficiency standpoint, it is best to allocate reliefs to taxpayers who are in a higher tax bracket than taxpayers in a low tax bracket. (To me, low tax bracket refers to if your annual taxable income is $80,000 or less, as incrementally you pay a rate of 11.5% beyond that income level) This is because each dollar of tax relief gives rise to more tax savings in the hands of a taxpayer in a high tax bracket.

Tax efficiency

Of course, I understand there is a question of equality as you and your siblings/spouse may contribute equally to supporting your parents. As such, you might think that everyone should split the relief equally. All in all, this is something you should discuss with your family to achieve the most tax efficient and satisfactory outcome to all parties.

Retirement support reliefs

There are generally 4 considerations to make before deciding on which relief (CPF Cash top-up or SRS) to contribute towards:

  1. Availability of funds to lock-up
  2. Your incremental tax rate based on your taxable income after family support reliefs
  3. Your risk appetite
  4. The objective you hope to achieve with your contribution

1) Availability of funds to lock-up

You should only consider these reliefs if you are willing to not touch these funds for decades. If you foresee yourself needing the money for upcoming expenditure like a home or a wedding, you should not be considering contributions to your CPF or SRS.

2) Your incremental tax rate

Similar to allocating your family support reliefs amongst your family, you should consider if you are in a high or low tax bracket before contributing. If you are in a low tax bracket, it might be better to pay a small amount of taxes in order to retain the flexibility of your cash. After all, you are locking up a large sum of cash for minimal benefit.

3) Your risk appetite

Once you have considered point 1 and 2, you are ready to make your contribution of SRS or CPF. Choosing between the 2 very much depends on your risk appetite as CPF gives you a guaranteed 4% per annum return while SRS intrinsically only pays you the prevailing bank rate. This means that SRS contributions need to be invested in riskier assets in order to match or outperform CPF.

I currently use my meagre SRS funds in undervalued dividend paying stocks.

4)  Your objective

If you have a low risk appetite, it is likely you will choose to contribute to CPF. As mentioned in part 2, you have to decide if you wish to fund your retirement or your health insurance and contribute to your SA or MA accordingly.

Summary

Here’s a simple flow chart to illustrate my overall tax planning strategy:

Tax planning flowchart

Currently, due to me still being in a low tax bracket, I’ve not contributed to my CPF SA or MA. I have contributed to SRS in the past due to experimentation and it fitting my desire to invest. However, going forward, I have decided to stop contributing as well to retain flexibility over my funds.

And that marks the end of this 4 part personal tax planning series. Do you agree with my strategy? Do you have a better strategy for your own tax planning? I look forward hearing to your suggestions.

Happy Hunting,
KK

PS: IRAS Corporate Communications reached out to me with some useful infographics to share with you guys. I’ve updated part 1 to include those infographics for your benefit.

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Personal tax planning 3: Supplementary Retirement Scheme

SRS

Welcome to part 3 of my basic personal income tax planning series! In this series of posts I hope to cover the following topics:

  1. Tax reliefs
  2. CPF Cash Top Up
  3. Supplementary Retirement Scheme (SRS)
  4. Bringing it all together – How to best utilise these reliefs to your advantage

In this part, I will cover how contributing to your SRS account can be used as a tool to mitigate your tax bill. Here’s a brief introduction to SRS.

What is SRS?

SRS is a government initiative to complement the CPF system and incentivise Singaporeans and PRs to save and invest more for retirement. It is completely privately operated and run by the 3 local banks – DBS, OCBC and UOB.

SRS is essentially a tax deferred investment vehicle. What this means is that contributions to the account (which is assumed to be derived from your income) are not subject to tax when contributed, but will be subject to tax years later when withdrawals are made. The beauty of this is that you can plan to commence withdrawals when you have retired and don’t have a high amount of taxable income, thus minimising your tax liability on withdrawal.

SRS Infographic

Assumes no early withdrawals

Some key points to note about SRS:

  1. General
    1. Statutory retirement age refers to the statutory retirement age at the time of your first contribution. This is currently 62 years old.
    2. You can only have 1 SRS account.
    3. The agent banks do charge fees on the transactions and account maintenance. The fee schedule for DBS and UOB can be found here and here. OCBC does not publish a fee schedule but based on my personal experience, there’s no account maintenance fees but I can’t recall the transaction costs but it should be comparable to DBS and UOB.
  2. Contributions
    1. Current annual contribution cap is $15,300.
    2. Contributions can be used for investments in stocks, bonds, gold, unit trusts and government treasuries.
    3. Cash balances are paid interest based on the prevailing bank interest rates.
  3. Withdrawals
    1. Early withdrawals before statutory retirement age are 100% subject to tax. It is also subject to a 5% penalty fee.
    2. 50% of withdrawals after statutory retirement age is subject to tax, ie if you withdraw $40,000, only $20,000 is subject to tax.
    3. You are given 10 years from the year you make your first withdrawal to completely withdraw your SRS funds.
    4. Point 3(b) when combined with point 3(c) plus the fact that the first $20,000 of taxable income in a given year is tax free, means that you can withdraw up to $400,000 worth of funds tax-free over 10 years, assuming you have no other taxable income sources.
    5. Withdrawals after statutory retirement age can be made in the form of cash or investments, subject to certain conditions.

Tax Relief

As mentioned in part 1, you will receive a dollar for dollar tax relief up to $15,300 per annum (due to current contribution caps) for your SRS contributions. Contributions can be made via iBanking by simply transferring the funds into the SRS account.

There’s nothing complicated about this relief, you just need to consider the Pros and Cons before contributing to SRS.

Pros and Cons

SRS Pros and Cons

Given the above, you should aim to accumulate no more than $400,000 of investments and contributions within your SRS account to maximise the tax benefits of this scheme. Of course, if you are fine with paying a bit of taxes, it is perfectly fine to disregard this target as you are still paying a relatively low tax rate as illustrated below.

Withdrawal tax exposure

Conclusion

The Supplementary Retirement Scheme is a tax deferred investment account that allows you defer your current taxes (through tax reliefs) to a future date while helping you save for retirement. This enables you to do some tax planning to mitigate your annual tax bill.

Now that you know about the 3 main tools at your disposal for personal tax planning, my last post of this series will examine the overall strategy that I employ for my own taxes as well as the priority I assign to each tax planning tool. Until next time.

Happy Hunting
KK