How much tax does a typical 25 year old pay ? No offence to our friend here...
It's rather common for 25 year olds to be at least in the 7% tax bracket (chargeable income over $40,000). A $7,000 top-up yields a near-immediate tax savings of $490 in that tax bracket. Not bad! That $490 can be saved, spent, or some combination, right away. Or you can think of it as a $6,510 Special Account top-up, with $7,000 then credited (immediate $490 bonus credit).
final1 said:
I am not too sure if Crimson fully understands what is the implication of what he has done and what impact it might have on decisions he might want to make in 5 to 10 to 15 years. (eg. buy a house).
No, it doesn't work that way.
If you are working and earning a reasonable or better salary, top up your Special Account at $7,000/year,
and convert OA to SA every month, then it will take
very few years to zoom your Special Account up to the Full Retirement Sum.
Let's suppose you're under age 35, you're earning $60,000/year, and you're making $7,000/year Special Account top-ups. In this example your (and your employer's) compulsory contributions to your Special Account will be about $3,600/year. Compulsory Ordinary Account contributions will be $13,800 between you and your employer. So in this scenario you've got $24,400/year flowing into your Special Account. The Full Retirement Sum will probably increase about 3%/year, but the interest you earn is greater than 4%. Add that all together, and in this scenario your Special Account reaches the (future) Full Retirement Sum in less than 7 years -- in about 6, actually. Not 10, not 15. SIX. If you're age 24 when you start, by age 30 you're done.
And you've pocketed $490/year in tax savings (7% bracket) -- about $3,000 in 6 years, excluding interest/investment gains -- which is unrestricted cash, not restricted Ordinary Account funds. You've got a pile of higher yielding money that can be withdrawn as early as age 55 and another pile that'll give you the full FRS-level CPF LIFE payout as early as age 65. And that means you've got that much less retirement savings to worry about. And you can
still buy a home if you want -- the right home, preferably HDB, when you've taken a bit of time to find the right spouse/partner who can also help with the (modest, actually) 10% down payment.
....And, on top of that, now isn't a great time to buy a home, if you're rational anyway. Yields are terrible, rents are low compared to valuations, and valuations are falling. It's probably a very smart move, in a persistently low yielding world, to grab tax reliefs and 4+ percent CPF interest. Wait a very few years, see how the market develops (or not), and then decide.
....And there are plenty of people who have absolutely no need for OA funds for a down payment on a home. They've got other sources of funds for that, and without difficulty. Those sources could be personal, familial, or some combination. If you're one of those many people, then it seems truly silly to deprive yourself of at least 1.5 percentage points of higher compounded interest and of significant tax relief. That's not smart.
Anyway, don't dismiss this idea. It's not crazy, far from it. It can be an extremely smart approach to optimizing CPF. Of course it depends on your situation, but there are many, many people that can (and do) benefit from this "Zoom the Special Account" approach. ("Zoom Medisave" too, perhaps.)