With all that savings in your SRS accounts, the next logical query is when you can access the money. SRS is designed such that account holders will incur a 5% penalty if they extract the money out before their retirement age — this penalty applies to all, be they Singaporeans or non-residents.
Non-residents are permitted to extract penalty-free before their retirement age, but only if they extract their SRS savings ten years after they have started an active SRS account (i.e. so long as a dollar is held in the account). They must also extract their SRS savings in full.
The beauty of SRS is in the tax discount. For every $2 you extract, the government will only tax on $1 — and you can utilise this tax concession to its fullest advantage. Because the first $20,000 of chargeable income is not taxed in Singapore, both a long-time non-resident and a Singaporean can effectively extract $40,000 ($20,000 multiplied by two) each year tax-free for your retirement spending. That works out to about $3,333 a month to spend.
To be clear, the difference here for a non-resident is that if he or she plans to extract the SRS savings after 10 years of holding the active account, he or she will have to extract in full to avoid a penalty. The tax-free extraction per year would be irrelevant in that case, though the tax discount — in the form of taxing just half of the SRS extraction sum — still applies.
Where there is also extra complication is how much non-residents will be taxed. This depends on whether you are a Singapore tax resident at the point of extraction. If so, you will be taxed based on the progressive tax rate followed by residents.
If not, you will be taxed differently, depending on how much you extract that year, and how much income you are earning at that point. The chart below sets out the flow and details:
Source: IRAS Note that the highest extraction tax of a flat 22% will apply if your SRS extraction exceeds $200,000, so one might want to keep an eye on SRS balance during top-ups to avoid paying higher taxes. If a non-resident converts to become a PR or Singaporean in the ten years of holding an SRS account, his SRS tax situation will follow that for Singaporeans and PRs.
SRS and withholding tax
The only main difference to note is that withholding taxes are imposed on non-residents extracting their SRS sums. If a foreigner or Singapore Permanent Resident extracts cash/investment from his or her SRS account — 50% or 100% of the extracted amount, depending on the type of the extraction — will be subject to a withholding tax.
The SRS bank operator will withhold an amount of tax at the prevailing non-resident tax rate of 22% at the point of extraction. This sum will be remitted to IRAS.
The withholding tax is not the final tax payable. Tax withheld on the SRS extraction is a tax credit that will be used to offset your actual tax liability. This means any unused tax credit will be refunded to you.
Example of penalty-free SRS extraction, and tax treatment. Source: IRAS
SRS for non-residents: do, or do not?
A sensitivity analysis may help to decide what is the right tax bracket and contribution amount for non-residents. Here are the key assumptionsin our sensitivity analysis. We are comparing under what scenario will a non-resident have more wealth after 10 years: using SRS for tax relief and investment, or just investing money after income tax.
Before we delve into the sensitivity analysis, let’s illustrate how it works using an example.
Meet non-resident John, who is in the 11.5% tax bracket Here’s a case study of John, who currently is earning $200,000 after all other tax relief (putting him in the 11.5% tax bracket). If he does not contribute $35,700 to SRS, he will only have $31,595 (post-tax monies) to invest.
He will manage to save and build up $480,013 without SRS contribution.
However, if he were to use SRS contributions, he would be able to invest a larger amount, although he will be liable for tax after 10 years.
If he manages to remain a Singapore tax resident, he will end up with $507,555 after taxes, a gain of $27,542.
However, if he becomes a non-SG tax resident, he would not be able to qualify for the concessionary withholding tax rate as he has a sizeable withdrawal amount of above $200,000. He would still end up with $482,725 after taxes, a gain of $2,712.
What is the SRS sweet spot for non-residents?
The coloured figures in the sensitivity table denote the losses or gains from SRS contributions for non-residents at the corresponding tax bracket and SRS contribution amount. The tables show how to identify John’s gains/losses from SRS contributions, at a 11.5% tax bracket, and with $35,700 annual SRS contributions.
Practically, unlike John, you may not work in Singapore for 10 years. You may only work for 5 years and hence contribute and invest your SRS for 5 years. To enjoy penalty-free withdrawal, you will only withdraw after another 5 years. This gives you the option to contribute more aggressively without exceeding the $200,000 threshold, which will lead to higher tax rates.
If you are at or above the 11.5% tax bracket, you should seriously consider contributing the full $35,700 into your SRS account, provided that you have no short-term cash needs. Your financial circumstances may change in the future, but later on, you can choose to reduce your SRS amount accordingly.
Learn more about SRS investment options next.
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