You will be able to explain how SRS withdrawals are taxed at and before retirement age.
Raymond's older cousin hit a rough patch at 52. A business deal fell through, and he needed cash quickly. He had about S$90,000 in SRS, built up over fifteen years, and he took most of it out, which the bank paid within days. The tax bill arrived the following year, and it was far bigger than he had planned for, because the whole withdrawal had been added to his income, with a penalty on top.
SRS relief is only half the story. The other half is how withdrawals are taxed, and that depends almost entirely on when you make them. This lesson covers both cases: withdrawing from the statutory retirement age, and withdrawing before it.
Once you reach the statutory retirement age that applies to your account, the one fixed by your first contribution as lesson 4.1, How SRS works and who it suits, explained, withdrawals get favourable treatment.
Only part of each withdrawal counts as taxable income. IRAS sets that share and publishes it. The taxable part is added to your other income for that year and taxed at the normal resident rates, with whatever reliefs you have.
You can also spread your withdrawals over a set number of years. The window opens with your first withdrawal, and IRAS sets how long it lasts. Within it, you choose how much to take out each year. If anything is left in the account when the window ends, IRAS's rules treat the remaining balance as withdrawn at that point, so plan to have emptied the account by then.
Withdrawals don't have to be cash. If your SRS holds shares or fund units, you can withdraw them as they are, and their market value on the day counts as the amount withdrawn.
The resident rates start with a zero band. In retirement, many people have little other taxable income. CPF LIFE payouts aren't taxable, and neither are most investment returns held in your own name, as module 5, Declare investment, rental and side income correctly, explains.
Put those facts together. If the taxable part of a year's SRS withdrawal, plus any other taxable income that year, stays inside the zero band, that year's withdrawal costs no tax at all. Even where it spills over, the slices above zero are taxed at the lowest rates.
Take the same balance out in one year, and much more of it lands in higher bands. Spreading the withdrawals over the window keeps each year's taxable amount small. That is why the timing of SRS withdrawals belongs in a retirement drawdown plan, and Retirement & Estate: income for life and a plan for what you leave, lesson 3.3, Time SRS withdrawals around your other income, covers how to fit them around other income.
Withdraw before the statutory retirement age, and two things change. The whole withdrawal becomes taxable. On top of that comes a penalty, as a percentage of the amount withdrawn, which IRAS sets.
So an early withdrawal hits twice: the full amount is added to your income in a year when you are probably still working, where much of it is taxed at your marginal rate or above, and the penalty is charged as well. That is what happened to Raymond's cousin. His S$90,000 went on top of his salary for the year, pushed a large slice of it into his highest bands, and the penalty was added after that.
There are exceptions. IRAS lists situations in which an early withdrawal is not penalised, or is treated more gently, such as withdrawals on medical grounds, on death, on bankruptcy, and for foreigners who meet conditions about how long they have held the account. The current list and conditions are on the IRAS website. Don't assume your situation fits until you have read them.
For planning, the practical rule is simple. Treat SRS money as unavailable until your statutory retirement age. If there is a real chance you will need it sooner, for a home, a business or a career break, it probably belongs outside SRS.
Money you contribute this year may not come out for thirty years, and the withdrawal rules may change in that time. The taxable share, the window, the penalty and the rates themselves could all be different by then. Nobody can promise the treatment you plan around today will still apply.
That's no reason to avoid SRS, but it is a reason to read the IRAS page twice, once when you contribute and again before your first withdrawal. Shu Ting added a note to her tax workbook: "Before the first SRS withdrawal, re-read IRAS withdrawal rules. Don't rely on this note."
For the activity, find on the IRAS website the age you could first withdraw without penalty and the rule for how much of each withdrawal is taxed, and write both down with the date you checked.
Write the age you can first withdraw and the rule for how much of each withdrawal is taxed.
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