You will be able to explain how SRS withdrawals are taxed, both at retirement age and before it.
Raymond's older cousin was 52 when a business deal fell through and he needed cash quickly (an invented example). He had about S$90,000 in SRS, built up over fifteen years, and he withdrew most of it before his statutory retirement age. The bank paid within days. The following year his tax bill was far bigger than he had planned for. The whole withdrawal had been added to his income, and a penalty was charged on top.
The tax relief you get on SRS contributions is only half the picture. The other half is how your withdrawals are taxed, and that depends almost entirely on when you withdraw.
Your statutory retirement age for SRS is fixed by your first contribution, as lesson 4.1, "How SRS works and who it suits", explains. From that age, your withdrawals get favourable tax treatment and no penalty.
From that age, only part of each withdrawal counts as taxable income. That part is the taxable share, which IRAS sets and publishes. The taxable part is added to your other income for that year and taxed at the normal resident rates, after any reliefs you have.
You can spread your withdrawals over a set number of years, called the withdrawal window. The window starts with your first withdrawal, and IRAS sets its length. Within it, you choose how much to withdraw each year. Under IRAS rules, any balance still in the account when the window ends is treated as withdrawn at that point, so plan to have emptied the account by then.
Withdrawals don't have to be cash. You can withdraw shares or fund units held in SRS as they are, and their market value on the day counts as the amount withdrawn.
The resident tax rates start with a zero band, where no tax is charged. Many retirees have little other taxable income. CPF LIFE payouts are not taxable, and most investment returns held in your own name are not taxable either (module 5, "Declare investment, rental and side income correctly", covers this).
If the taxable part of a year's SRS withdrawal, plus any other taxable income you have that year, stays inside the zero band, you pay no tax on that year's withdrawal. If it goes over the zero band, the amount above it is taxed at the lowest rates. Withdrawing the whole balance in one year pushes much more of it into higher bands. Spreading your withdrawals across the window keeps each year's taxable amount small.
This is why the timing of your SRS withdrawals belongs in your retirement drawdown plan. Lesson 3.3, "Time SRS withdrawals around your other income", in the course "Retirement & Estate: income for life and a plan for what you leave", shows how to fit them around your other income. When you reach your statutory retirement age, work through these steps in order:
Confirm the statutory retirement age for your account, which your first contribution fixed. Check the IRAS taxable share and the window length. Begin withdrawing. The window starts with your first withdrawal. Each year, choose an amount so that its taxable part plus your other taxable income stays in the zero band, or as low in the bands as you can. Empty the account before the window ends, or the remaining balance will be treated as withdrawn. If you choose, withdraw shares or fund units in kind. They are valued at market value on the day.
Before your statutory retirement age, two things change. The whole withdrawal becomes taxable, and a penalty is added on top. The penalty is a percentage of the amount withdrawn, and IRAS sets it.
An early withdrawal therefore costs you twice. The full amount is added to your income, usually in a year when you're still working, so much of it is taxed at your marginal rate or higher. You are charged the penalty as well. Raymond's cousin's S$90,000 was added on top of his salary for that year, so a large slice of it went into his highest tax bands, and then the penalty was added.
IRAS lists situations where an early withdrawal is not penalised or is treated more gently. Examples include withdrawals on medical grounds, on death, on bankruptcy, and by foreigners who meet conditions on how long they have held the account. The current list of exceptions and their conditions is on the IRAS website. Don't assume your situation qualifies until you have read them.
As a practical rule, treat SRS money as unavailable until your statutory retirement age. If there is a real chance you will need the money sooner, for a home, a business or a career break, it probably belongs outside SRS.
Money you contribute this year may not be withdrawn for thirty years, and withdrawal rules can change over that time. By the time you withdraw, the taxable share, the window, the penalty and the tax rates could all be different, and nobody can promise that today's treatment will still apply. This is no reason to avoid SRS. It does mean you should read the IRAS page twice: once when you contribute, and again before your first withdrawal.
Shu Ting wrote a note in her tax workbook reminding herself to re-read the IRAS withdrawal rules before her first SRS withdrawal, and not to rely on the note itself.
For the activity, go to the IRAS website and find the age at which you could first withdraw without penalty, and the rule for how much of each withdrawal is taxed. Write both down with the date you checked.
Write down the age at which you can first withdraw, and the rule for how much of each withdrawal is taxed.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).