Top up These Accounts by Year End to Saving Income Tax

The year end is approaching. Many clients and friends ask me again what a person can do to reduce the individual income tax in this calendar year. Here I summarised some of the points from my previous articles to provide a simple and clear answer.

Top up SRS Account

About SRS: SRS is short for Supplementary Retirement Scheme. It is one of the common ways to accumulate retirement income in Singapore.

Top-up Limit: Currently, the annual SRS top-up limit for Singapore Citizens and PRs is $15,300, and for foreigners is $35,700.

Tax Relief Amount: The amount topped up to SRS account is fully tax deductible.

Withdrawal: The age to withdraw money from SRS account in a standard way is 62. When you start the withdrawal, you have up to 10 years to fully withdraw everything from your SRS account. During the withdrawal period, only 50% of the withdrawal amount is taxable. Because a person’s working income is usually very low after age 62, and taking into consideration that the first $20,000 of annual income is not taxable in Singapore, most people do not need to pay income tax when they withdraw from their SRS accounts.

Account Return:  SRS account only offers an interest rate similar as a saving account. But you can use a wide range of investment vehicles to invest the money in your SRS account, including fixed deposits, bonds, endowment plans, unit trusts, ETFs, listed stocks and REITs.

How to Top up: If you do not have an SRS account yet, you may open one at your convenience. The three local banks in Singapore (DBS/ POSB, UOB and OCBC) offer SRS account opening service, and it can be done via Internet banking. Once the SRS account is opened, you can transfer money from your saving account to your SRS account to top it up.

Top up CPF Special Account or Retirement Account

About Special Account and Retirement Account: Special Account and Retirement Account are two CPF accounts. Retirement Account is opened only after a person’s age 55. Before age 55, you mainly use your Special Account to save for retirement. After age 55, you mainly use your Retirement Account to save for retirement.

Top-up Limit: Currently, if you are less than 55 years old, you can top up Special Account with top-up limit $181,000. If you are more than 55 years old, you can top up Retirement Account with top-up limit $271,500.

Tax Relief Amount: Currently, if you are less than 55 years old and your Special Account balance is less than the top-up limit $181,000, you can enjoy tax relief for up to $7,000 of your top-up amount. If you are more than 55 years old and your Retirement Account balance is less than $181,000, you can enjoy tax relief for up to $7,000 of your top-up amount.

Withdrawal: When you are 55 years old, if the money in your Special Account exceeds the required sum set by the government, you can withdraw the exceeding amount. The money in Retirement Account is exclusively for CPF LIFE plan, so you are not able to withdraw from it at your discretion.

Account Return: The interest for CPF Special Account and Retirement Account is provided by the government. The current annual interest rate for both accounts is 4%.

How to Top up: Top-up can be done on CPF website. You may refer to label “How do I make a CPF transfer or cash top-up to build up my retirement savings?” in the link here for the steps.

Top up CPF Medisave Account

About Medisave Account: Medisave Account is a CPF account used for medical expenses and health insurance premiums.

Top-up Limit: Currently, the annual top-up limit for Medisave account is the lower of (a) and (b) below: (a) $37,740 - Your compulsory CPF contribution in the current calendar year; (b) $60,000 – Your Medisave Account balance.

Tax Relief Amount: The full amount topped up to Medisave Account is tax deductible.

Withdrawal: The money in Medisave Account is strictly for designated medical expenses and health insurance premiums. You are not able to withdraw it at your discretion

Account Return: The interest for CPF Medisave Account is provided by the government. The current annual interest rate is 4%.

How to Top up: Top-up can be done on CPF website. You may refer to the link here for the steps.

Case Study

Here we use an example to illustrate how much tax one may save using the three approaches above. Assuming that after deducting all the other tax relief items, Mr Tan has a taxable income of $100,000 for Calendar Year 2020. Based on the income tax rate table in Singapore (you may refer to the link right after this paragraph), the income tax payable for Mr Tan in 2021 is $3,350 + ($100,000 - $80,000) x 11.5% = $5,650. Now Mr Tan tops up $15,300 to his SRS account, $7,000 to his CPF Special Account, and $3,000 to his CPF Medisave Account. The total tax relief via these three methods is $15,300 + $7,000 + $3,000 = $25,300. In this way, the taxable income for Mr Tan in Calendar Year 2020 is reduced to $100,000 - $25,300 = $74,700. Based on the same income tax rate table, the income tax payable for Mr Tan in 2021 is $550 + ($74,700 - $40,000) x 7% = $2,979. So Mr Tan will enjoy a tax saving of $5,650 - $2,979 = $2,671. For residents with a higher annual income, this tax saving effect is more significant. But there is one point to note: The total tax relief cap for a tax resident in Singapore is $80,000 per year.

Singapore Individual Income Tax Rate Table

That’s all for my sharing in this session. If you have any relevant questions, welcome contacting me directly for a discussion.