David Bach, in his books mentioned about pre-tax investing. So what is pre-tax investing and is it relevant in Asia context? Pre-tax investing, according to David Bach, means that bypassing the government tax to do investing. This is relatively a very important concept in UK and US as the tax is very high (about 30%). But, in Singapore, though there is tax but it is relatively low (for more info, check out MOF website) and there is so many reliefs & rebates (for more info, click here).With the change to CPF rules in April 2008 (1st S$20,000 in Ordinary Account cannot be invested), we cannot leverage on CPF to do investment anymore. So Sad. Because CPF to me is the mother of all investment accounts. Anyway, so what about SRS? Well, it really doesn't make sense to leverage on SRS to investment too.
Why? Simple, first to draw out the money, you have to wait until the statutory retirement age, which is 62 (7 years later than CPF) otherwise, you will be penalised. Second, if I am not taxed (due to low income plus reliefs & rebates) and invested about S$10,000p.a., after 26years compounded at 8%, I should have S$863,507.68. Now, if I invest using just plain Cash, I would have S$863K all tax-free as there is no capital gain tax in Singapore (ok, even I am taxed, I am taxed 3.5~5.5% on my current income and not the whole S$863K). However, if I invest using my SRS account, I am TAXED on my S$863K! Ain't this incredible?
Maybe SRS do make sense when a person is a high income earner who wants to deferred tax. But, I am still not yet a high income earner, hence, SRS doesn't make sense to low-to-average income earners as a pre-tax investment tool. Cash, at least for low-to-average income earners, is still the best form of investment now :)
Disclaimer
The above information is wholy author's personal opinion. It does not intend to replace any professional advice. If legal advice or other professional advice, including financial, is required, the services of a competent professional person should be sought.
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1 comment:
Hi Fellow Automated Millionaire,
Why I like too do investment through CPF is because of 2 major reasons:
1. It's Tax Free! All my contribution to CPF is tax free and by doing volunteer contribution to CPF, my taxable income is also reduced! So I can kill 2 birds with 1 stone!
2. As an employee of a company, my employer will give me 14.5% of my income more to invest or buy a house. So it's free money!
However, this will change with the new "enhancement" done by the Singapore Government, where your 1st S$20,000 in CPF (OA) is entitled 1% interest more but this S$20,000 cannot be used for Mutual Funds investment. It is quite relatively hard to achieve S$20,000 in CPF (OA) as one would already used it to buy house and monthly payment of the mortgage.
I am really hoping that Singapore Government would remove this so that we, as Automated Millionaires, would have even bigger returns and better retirement funds! :)
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