Let’s do a little role play. You are an international criminal mastermind, wanted by the authorities in 14 countries. Your crime ring has prospered, earning you an obscene amount of money. You could buy over a small country (or attend a Mitt Romney fundraiser) if you wanted to. You’ve also covered your tracks well. The police have got nothing on you, so they’re targeting the easiest piece of evidence they can find – your money.
Tipped off by your trusty financial advisor, you move your money in small parts to a secret bank account in the Cayman Islands. By the time the police crack open your “official” bank accounts, they can’t find anything to charge you with. So once again, you escape scott-free… and tax-free.
The awesomeness of tax-advantaged accounts
Death and taxes are the only 2 sure things in life (That, and the fact that you can never find your keys when you’re late for work on Monday morning).
You can’t escape the first, but you can totally lower the second… legally. You may not have a secret Cayman Islands bank account, but the governments of the world, in their benevolence, have offered the next best thing: tax-advantaged accounts.
I’ll talk about tax-advantaged accounts for Singaporeans, or people living in Singapore, in this post. Americans, you already have more than enough information out there on your tax-advantage accounts – Google it. (Hint: Sign up for a 401k and contribute enough to max out your employer match. You guys are so lucky).
Singaporeans – you have a little-known account called a Supplementary Retirement Scheme (SRS). The SRS is sort of like a beautiful exotic girl who’s been hidden on an island. She’s got a weird-sounding name, not many people have heard of her, but she’s got huge… benefits.
The photographer claims that the girl just *happened* to walk into the shot and he just *happened* to press the shutter. Honest!
Why the SRS is awesome
1. It gives you tax-benefits
Think of the SRS as your own secret tax-free bank account for you to stash a whole bunch of moolah in. Every dollar you contribute into that bank account reduces your taxable income by a dollar.
So if your tax rate is 7%, contributing $12,750 a year effectively saves you $892.50 in taxes every year. Ta-dahhhh, you just earned your next weekend getaway vacation! You’re welcome.
It’s purely voluntary, meaning that you can contribute any amount you like, up to a cap of $12,750 a year (Yeah, the government realizes how awesome this is too, so they’ve gotta put a limit on how much you can screw them over by not paying taxes).
2. It boosts your investments
What are you gonna do with all that money you’ve put into it? Don’t be a kuku and just leave it sitting there (remember my post on Don’t Save For Retirement?). Instead, invest it – preferably in a couple of index-based ETFs – and let your money grow absolutely tax-free.
There’s also a hidden benefit to investing that cash. By not paying $893 in taxes, that means that you’ve earned a guaranteed 7% return on your $12,750 for that year (ie: if you invested that $12,750, your investment would have had to grow by approximately 7% just to match the tax savings).
If you can resist the temptation to withdraw your investments till you’re 62, you’ll only be taxed for 50% of the prevailing tax rate. That may seem annoying at first, but ask yourself:
Would you rather pay 1) a 10% tax on $100,000, or 2) a 5% tax on $1,600,000? (Hint: The answer is option 2).
Sure, option 2 entails you paying more in taxes, but it also means that you have ONE POINT FIVE MILLION DOLLARS to play with after tax. Paying more tax is a good thing – it means you’re richer. By not paying tax initially and deferring it till the end, you’re effectively allowing your whole amount of cash to work harder for you.
3. It’s flexible on withdrawals
Unlike CPF, you’re allowed to withdraw your cash pretty much anytime you like. It’s meant to be kept till you’re retired, but if you really need the cash before you’re 62 you’ll have to pay a 5% penalty and get taxed for 100% of the rate (The penalty is waived if it’s withdrawn in the event of death or medical cases). It’s annoying to have to pay those, but at least you still get access to it if you really need it for an emergency.
“What are we gonna do tonight, Brain?” “The same thing we do every night Pinky… Try to open a TAX-ADVANTAGED ACCOUNT!”
How to set up your own criminal mastermind account
1. Contact any one of the three local banks (DBS / OCBC / UOB) to set up an SRS account. If you already have another savings account with those banks, you probably won’t even need to visit the branch – just download the application form from their websites. If you’re Singaporean, all you need is a copy of your NRIC.
2. You won’t even need to make a claim in your annual tax return – it’ll be automatically done for you through your SRS operator. Yay to #FirstWorldAwesomeness
3. If you’re a foreigner living in Singapore, the contribution cap is different, but all of the above apply to you too. You’ll also have to submit an annual IRAS declaration form.
And finally…
Congratulations – you’ve now embarked on your journey towards being a world-class, financially-savvy criminal mastermind. So if you’ve got nothing to do tonight, maybe you can try to TAKE OVER THE WORLD!
