Getting SRS tax relief for $153,000 and get back $400,000 tax-free!

I was searching online but could not find an answer to my question: How will I receive dividends if I have bought stocks with money from my Supplementary Retirement Scheme (SRS) account?

It is definitely NOT paid to your usual Central Depository (CDP) GIRO account, so you will not have usable cash. The dividend paid shows up as cash available in your SRS account balance, which can be re-invested in more stocks!

Next is the question on what is exactly taxable when we were to withdraw the SRS money at 62?

Dividends are taxed at source (Corporate Tax) and Singapore does not have Capital Gain Tax, BUT when the dividends and capital gains are paid back into the SRS, it will be taxable... I hope I am wrong, but it seems to be that way. Given such a situation, it means that one will probably stop contributing to SRS once the available balance is close to $400,000, based on current tax rates, or whatever the minimum taxable income is when we are 62. $400,000 is the current tax-free break-even point. You can read the detailed illustration on the IRAS page.

Based on a contribution cap of $15,300/year from 2016, an investment horizon of 10 years (provided you start by 37 years old) will easily get back $400,000 (with dividends (5% yield) reinvested and a conservative 0% capital gain included.) If you are 37 years old this year, you are in luck! If you are younger, you probably don't even need to contribute for 10 years.

What to buy as a first stock?

Recently I met a young guy who was interested to invest. He started investing a few months ago and had earned a few hundred dollars. I was curious to find out whether it was a continuous lucky streak or something methodological.

The method he used:

1. Read blogs written by Singaporean bloggers (there are a few popular ones that show up when you google) and buy on recommendation.

2. Read forums patronised by Singaporean retail investors and investors wannabes. Buy on recommendation by credible forumers.

3. Finally, sell once the price passes buy price + 5%. If there is strong momentum, wait and see to how high it can go. Once it starts to fall, sell.

Interestingly, this is actually very methodological, but is akin to playing a game of musical chairs. The good thing is everybody knows that they are in a game of musical chairs and they don't want to be the last guy standing, so this method of investing is speculative at best.

I would not discourage this practice as this was the same way I learnt about the stock market. I joined multiple games of musical chairs and earned a tidy sum. However, if I were to go back in time to advice my neophyte self what to buy as a first stock, I will recommend the 1 lot (1000 units) of the STI ETF to lock in some dividend income first (yield is secondary). At today's price, it will cost about $3500 (average yield 2.5%). After that, play a few rounds of musical chairs to experience what it is like to play a speculative game and observe and learn how to recognise speculative patterns.

The writer does not own any shares mentioned.