Reduce Tax while saving 1million by the age of 65
It is time of the year. December! While everyone is getting into festive mood. Let tie up some loose end for the year. I will be exploring tax reduction this year.
There are numbers of ways for us to reduce our tax even if we are employed. And I had chosen 2 that fits my bill for me.
Before we even start, we need to get ready these 2 information:
- Income tax bracket: To determine if it make sense for you to reduce tax
- Tax relief: Find from Iras what is your chargeable income after relief IRAS Personal Reliefs Eligibility Tool
| Chargeable income | Income tax | Calculation (income tax rate) |
| Up to $20,000 | None | 0% |
| $30,000 | $200 | 2% on $10,000 |
| $40,000 | $550 | 2% on $10,000 + 3.5% on $10,000 |
| $50,000 | $1,250 | 2% on $10,000 + 3.5% on $10,000 + 7% on $10,000 |
| $60,000 | $1,950 | 2% on $10,000 + 3.5% on $10,000 + 7% on $20,000 |
| $70,000 | $2,650 | 2% on $10,000 + 3.5% on $10,000 + 7% on $30,000 |
| $80,000 | $3,350 | 2% on $10,000 + 3.5% on $10,000 + 7% on $40,000 |
| $90,000 | $4,500 | 2% on $10,000 + 3.5% on $10,000 + 7% on $40,000 + 11.5% on $10,000 |
| $100,000 | $5,650 | 2% on $10,000 + 3.5% on $10,000 + 7% on $40,000 + 11.5% on $20,000 |
| $110,000 | $6,800 | 2% on $10,000 + 3.5% on $10,000 + 7% on $40,000 + 11.5% on $30,000 |
| $120,000 | $7,950 | 2% on $10,000 + 3.5% on $10,000 + 7% on $40,000 + 11.5% on $40,000 |
Ways to reduce your income tax in Singapore
| Tax reliefs | Cap / estimated amount |
| CPF Top Up (your + loved ones’ SA) | $7,000 + $7,000 |
| CPF Top Up (your Medisave) | Depends on your Medisave balance |
| Put money in SRS account | $15,300 (SC / PR) or $35,700 (foreigners) |
| Be a working mum | Potentially 100% of income |
| Move in with parents / grandparents | $18,000 |
| Attend courses | $5,500 |
| Claim (non-reimbursed) employee expenses | N/A |
| Claim expenses for your business | N/A |
| Claim rental expenses | 15% of rental income + home loan interest |
| Donate money, shares or other items | 250% of donation value |
| Income tax relief ceiling | $80,000 |
Planning for retirement using Rule of 72
Retirement planning should start young leveraging on compounding effect made popular by Warren Buffett.
Full Retirement Sum ($181,000 in 2020) was growth from my last known of $155,000. There is the effect of compounding on inflation (3%). Scary!
Compound interest is such a powerful yet neglected idea, that Albert Einstein famously called it "the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."
The real key to benefiting from compound interest is to invest early and often, and to let the magic run its course. It will take some time, but eventually, you begin to see real growth in the numbers.
There is a neat trick to figure out how your might grow called the Rule of 72.
The Rule of 72 states that given a fixed rate of return, you can figure out how fast you will double your investment by dividing the number 72 by the rate of return.
If you expect to receive 10% return each year, you divide 72 by 10, and you discover that it will take you approximately 7.2 years to double your money.
Pretty neat!
CPF (SA) Top Up
SA account that earn 4% guaranteed. It is very hard to beat. Use Rule of 72 to project how long 4% can double your money.
So 72 / 4% = 18 years. This tenure is usually within most endowment plan offered outside. So another words, if I will be top up SA to $90,500 and technically 18 years later it will becomes double.
Did I mention also that money that is top up to SA account is safe from creditor if you go bankrupt?
Loo Cheng Chuan is the founder of the 1M65 movement which imply hitting 1 million by the age 65. Using the same methodology discussed above, if you save $130,000 by 30 years old in SA. You will compound 1 million dollar in your CPF by the age of 65. Read more from Loo himself at his column via his opinion.
Seedly.sg shared the steps to top up cash into SA using paynow.
However, you are only limited to $7,000 for your own SA account. Don't worry, if you need more you should considering the benefit of topping up another $7,000 into your parent's account instead of giving them allowance.
SRS account top up
For every $1 that you invest in SRS account for retirement, you get $1 tax dollar reduction. Max contribution cap is $15,300. SRS is only useful if you are nearing your tax bracket where you jump between tier. This way you get to ripe the most benefit.
Do note that SRS account is a long term investment towards your retirement nest. Hence, once you invest you can only withdraw at age 62. Any withdrawal before that will have penalty of 5%
- Immediate tax relief
- Low interest rate 0.05% unless you choose to re-invest
- Withdrawal limit of age 62
- Future withdrawal of investment dividend can be tax
Seedly.sg shared how to top up $1 To Your Supplementary Retirement Scheme (SRS) Account.
It make sense for middle to high income earner who wish to drop their tax bracket, however do consider not to invest too young for SRS as the growth of fund might not make sense during future withdrawal as the tax safe now will be offset by the future tax impose during withdrawal.
Comments
Post a Comment