Another CPF Hack: The "Medisave Partner Push"

[BBCWatcher]

I've figured out another CPF "hack," and I'm going to dub it the "Medisave Partner Push." This hack applies in the following situation:

1. There are two CPF members: you and a spouse, typically.

2. One of you hits the CPF Annual Limit ($37,740), i.e. only one of you is relatively high earning or higher.

3. The other CPF member earns income from work in Singapore but has a lower income, has some room below the CPF Annual Limit, and is in a non-zero tax bracket, i.e. can qualify for some more income tax relief. (Or in some cases this partner will have a high income but it'll be steady, with little or no variable income. And so 4/17ths or 5/17ths of the CPF Annual Limit will still be available.)

Ordinarily the spouse in the higher tax bracket should be the one to handle all Medisave withdrawals, including MediShield Life and Integrated Shield premiums for the household. But not in this exceptional case. In this case, it's smarter if the spouse that isn't hitting the CPF Annual Limit assumes the Medisave spending, including MediShield Life/Integrated Shield premiums for the household. That's because the lower earning spouse still qualifies for tax relief and can still voluntarily top up his/her Medisave Account on two occasions: (a) on January 1st or 2nd, when the Basic Healthcare Sum is raised, and (b) just after insurance premium and other qualified withdrawals from Medisave.

The higher earning spouse will still max out his/her CPF tax relief through compulsory contributions, plus can still voluntarily top up his/her Special Account ($7,000 for tax relief). But since the higher earning spouse has no room below the CPF Annual Limit, it makes sense for the other spouse with room below the limit to spend the Medisave dollars -- and to replenish them quickly, for some more tax relief across the household.

....And there you go. That's the "Medisave Partner Push," pushing Medisave spending (and top-ups) onto the lower earning partner when only one of you has room below the CPF Annual Limit and when that lower earning partner's Medisave Account will be voluntarily topped up. Do that and you can increase tax relief across the household, and you can maintain high Medisave account balances with some nice Medisave interest earning.

Please note that practically anyone can top up a CPF member's account. If you go to CPF e-Cashier or an AXS kiosk, and if you know the CPF member's NRIC, you can top up that member's Medisave Account -- it's that easy. So the source of top-up funds doesn't necessarily need to be the particular CPF member him/herself. Just be careful about any weird/exotic gift limits that might apply (example: long-term residents and citizens of Japan who left Japan within the past 10 years; they are still subject to Japanese gift limits).

We probably ought to have a master thread pointing to these CPF hacks.

 

[JuniorLion]

Good idea, I'd say.

One quick question here:
Supposed I know I'll hit the CPF AL in 2018. Then come 4th Jan 2018, BHS becomes 54500, and I currently have 52000 in it. Would it be worth it to top up $2500 to hit the BHS?

Subsequently, all CPF contributions into Medisave will flow into SA.

Come Feb 2019, CPF Board will refund the 2500 into the bank account.

What are the pros/cons of doing this?

 

[BBCWatcher]

Supposed I know I'll hit the CPF AL in 2018. Then come 4th Jan 2018, BHS becomes 54500, and I currently have 52000 in it. Would it be worth it to top up $2500 to hit the BHS?
Subsequently, all CPF contributions into Medisave will flow into SA.
Come Feb 2019, CPF Board will refund the 2500 into the bank account.

I'd say no. That'll push more funds into your Special Account (and then eventually Ordinary Account, which earns less interest), but that also means you have less time/fewer years of $7,000 annual tax relief top-ups available.

I assume the logic is that Medisave funds are restricted, "forever," but remaining Special Account and Ordinary Account funds at age 55, after at least BRS-level, become unrestricted. So if you extremely highly value throwing a big champagne bash at age 55 -- where's my invitation? -- then I guess you could do this. If you keep doing it, every year, then it's a way to keep Medisave capped at the 2017 BHS, for example. This play keeps getting more and more expensive, though, as the BHS keeps increasing. This year (2018) it'll cost the interest loss on $2,500, then next year it might cost the interest loss on $5,500, and so on. And if the gap between your Medisave Account balance and the BHS ever widens beyond the CPF Annual Limit, you won't be running this blocking maneuver fully since your Medisave blocking top-up must still fit within that limit.

 

[JuniorLion]

I'd say no. That'll push more funds into your Special Account (and then eventually Ordinary Account, which earns less interest), but that also means you have less time/fewer years of $7,000 annual tax relief top-ups available.

I assume the logic is that Medisave funds are restricted, "forever," but remaining Special Account and Ordinary Account funds at age 55, after at least BRS-level, become unrestricted. So if you extremely highly value throwing a big champagne bash at age 55 -- where's my invitation? -- then I guess you could do this. If you keep doing it, every year, then it's a way to keep Medisave capped at the 2017 BHS, for example. This play keeps getting more and more expensive, though, as the BHS keeps increasing. This year (2018) it'll cost the interest loss on $2,500, then next year it might cost the interest loss on $5,500, and so on. And if the gap between your Medisave Account balance and the BHS ever widens beyond the CPF Annual Limit, you won't be running this blocking maneuver fully since your Medisave blocking top-up must still fit within that limit.

Thanks for your comments!

There is an optimum point -- but one has to do some mathematical calculations to decide whether it is worth it or not.

 

[BBCWatcher]

The “Medisave blocking” technique you’re asking about depends on your reliably hitting the CPF Annual Limit. If you lose your job (or cannot work) and don’t hit the CPF Annual Limit then some or all of that year’s “blocking” Medisave top-up will remain in Medisave instead of being returned to you. Then you’ve really shot yourself in the foot. All you’ve done is cost yourself some nice 4% annually compounded interest — maybe several years of nice interest.

However, if you are a high and consistent earner (and with at least $30K/year of variable income from work), if you highly value age 55 withdrawable funds, and if you do not assign much value to Medisave funds, then you might attempt this “blocking” manuever. It’s not a maneuver I would personally choose.

 

[jackieatbtu]

I don’t understand why the $2500 would be refunded in feb 2018? I thought if top up to max bhs before the dec contribution is in, it will flow to sa and that is the end of story? Provided still within cpf annual limit.

 

[JuniorLion]

I don’t understand why the $2500 would be refunded in feb 2018? I thought if top up to max bhs before the dec contribution is in, it will flow to sa and that is the end of story? Provided still within cpf annual limit.

Your last sentence can be explained by post #2.

 

[happykapy]

I also don't understand.

Why not top up the Medisave now, earn the extra 4% for these few months?

Then end of year get credited back 2500 without interest ?

I don’t understand why the $2500 would be refunded in feb 2018? I thought if top up to max bhs before the dec contribution is in, it will flow to sa and that is the end of story? Provided still within cpf annual limit.

 

[BBCWatcher]

Why not top up the Medisave now, earn the extra 4% for these few months? Then end of year get credited back 2500 without interest ?

Because you don't get that 4% interest on a refunded top-up, that's why. Without interest means without interest. You're tying up $2,500 for a year that could be invested elsewhere, working for you.

The only thing a $2,500 Medisave top-up (above the CPF Annual Limit) would accomplish is it would cause more of your compulsory contributions to spill over into your Special Account (or into your Ordinary Account if your Special Account has already reached the Full Retirement Sum). You might be interested in executing this "blocking" move if (and only if):

(a) You are a high and consistent earner (and with at least $30K/year of variable income from work), so that you always reliably hit the CPF Annual Limit;

(b) You highly value age 55 withdrawable funds; and

(c) You do not assign much value to Medisave funds.

I wouldn't do it. It's "too cute."

 

[happykapy]

Ok thanks for your insight.

My situation is

1) SA is maxed out and I hit the yearly ceiling the past 2 years.

I don’t see a problem topping up the 2.5k into Medisave, to force the overflow into OA and earn 2.5% on that amount first.

Don’t really find that too “cute”. Lol

Because you don't get that 4% interest on a refunded top-up, that's why. Without interest means without interest. You're tying up $2,500 for a year that could be invested elsewhere, working for you.

The only thing a $2,500 Medisave top-up (above the CPF Annual Limit) would accomplish is it would cause more of your compulsory contributions to spill over into your Special Account (or into your Ordinary Account if your Special Account has already reached the Full Retirement Sum). You might be interested in executing this "blocking" move if (and only if):

(a) You are a high and consistent earner (and with at least $30K/year of variable income from work), so that you always reliably hit the CPF Annual Limit;

(b) You highly value age 55 withdrawable funds; and

(c) You do not assign much value to Medisave funds.

I wouldn't do it. It's "too cute."

 

[BBCWatcher]

I don’t see a problem topping up the 2.5k into Medisave, to force the overflow into OA and earn 2.5% on that amount first.

I do.

If you don’t top up your MA (because you’re going to hit the CPF Annual Limit), your compulsory MA contributions stream into MA, up to the (new) BHS, and earn 4% there. That 4% interest flow credits to your Ordinary Account (since your SA is at or above the Full Retirement Sum), where it further compounds at 2.5%.

If you do top up your MA (and hit the CPF Annual Limit), your compulsory MA contributions stream into OA, where they earn only 2.5%. Your MA top-up is refunded, without interest (and without interest that money could have been earning elsewhere), and next year you’ve got a bigger gap between your MA balance and the BHS — that much more for your compulsory MA contributions to fill when you’ve finally figured out this is not a wise maneuver.

No, I don’t think it’s a smart move, except if all three conditions I described downthread are true. There’s a significant cost (lost interest) if you pull that move, and there must be sufficient offsetting reasons. The reasons I gave (all of them) must apply, otherwise this doesn’t make rational sense to do.

 

[ckchia88]

CPF annual limit 37740 include RA top up?

 

[happykapy]

Thanks for your insight.

Useful to talk and learn more.

I guess there will a fine line between topping up the MA now, and earning the overflow interest at 2.5%.
(I would still assume the remaining amount that is Not topped up 52k will still earn the 4% after the refund.)

Vs waiting for it to be auto topped up after a few months and then earning the 4% in MA.

Would you know - what is the ceiling of 37740 is reached in June. For example.
What happens to the rest of the contributions?

Thanks!

I do.

If you don’t top up your MA (because you’re going to hit the CPF Annual Limit), your compulsory MA contributions stream into MA, up to the (new) BHS, and earn 4% there. That 4% interest flow credits to your Ordinary Account (since your SA is at or above the Full Retirement Sum), where it further compounds at 2.5%.

If you do top up your MA (and hit the CPF Annual Limit), your compulsory MA contributions stream into OA, where they earn only 2.5%. Your MA top-up is refunded, without interest (and without interest that money could have been earning elsewhere), and next year you’ve got a bigger gap between your MA balance and the BHS — that much more for your compulsory MA contributions to fill when you’ve finally figured out this is not a wise maneuver.

No, I don’t think it’s a smart move, except if all three conditions I described downthread are true. There’s a significant cost (lost interest) if you pull that move, and there must be sufficient offsetting reasons. The reasons I gave (all of them) must apply, otherwise this doesn’t make rational sense to do.

 

[JuniorLion]

Vs waiting for it to be auto topped up after a few months and then earning the 4% in MA.

Would you know - what is the ceiling of 37740 is reached in June. For example.
What happens to the rest of the contributions?

Thanks!

$37740 is the CPF Annual Limit. It is the sum total of your employer's contribution + employee's contribution .

When your salary is $6000 and above, you will be getting a $2220 in CPF contribution per month. If you are getting very high variable bonuses (which are eligible for CPF contribution), then those will be counted in.

If by June, you had already gotten $37740, then the following holds:
1) You will no longer be allowed to do a voluntary top up to your CPF; and
2) Any further CPF contribution from employment will continue to flow into your CPF.


Note that you are still allowed to do a $7000 top-up (eligible for tax reliefs) under the RTSU (Retirement Sum Topping Up Scheme) to your SA, provided your SA is below FRS. Once hit FRS, you are not allowed to do the RTSU.

 

[JuniorLion]

CPF annual limit 37740 include RA top up?

Excluding RTSU to your SA.

If you're below 55, you can do a RTSU top up to your SA till you reach FRS.
If you are 55 and above, you can do RTSU top up to your RA till ERS.

 

[kehyi4]

...
If by June, you had already gotten $37740, then the following holds:
...
2) Any further CPF contribution from employment will continue to flow into your CPF.
...

erm, this part is not accurate

If you have hit CPF Annual Limit ($37,740) for the year, what happens is you (and your employer) stop contributing to CPF from employment: it's called a "Limit" for a reason you know

This would never happen by Jun though, even if you get crazy $30k+ bonus before that, because of the $6k mthly salary limit: since ordinary wages is limited to 6k per mth, you will only hit CPF AL in Dec

source: personal experience

If you really want to play around with this, CPF has a calculator for you to simulate different wage scenarios:
https://www.cpf.gov.sg/eSvc/Web/Services/CPFAdditionalWageCeiling/IndexEmpl

 

[JuniorLion]

erm, this part is not accurate

If you have hit CPF Annual Limit ($37,740) for the year, what happens is you (and your employer) stop contributing to CPF from employment: it's called a "Limit" for a reason you know -- (a)

This would never happen by Jun though, even if you get crazy $30k+ bonus before that, because of the $6k mthly salary limit: since ordinary wages is limited to 6k per mth, you will only hit CPF AL in Dec
-- (b)
source: personal experience

Your claims to (a) is inaccurate. Just happened for me in 2017 December contribution. Flows continue.

Your claims to (b) is also inaccurate. Wages can be flagged as "BONUS" by employer and the $2220 monthly limit does not hold. As examples from my previous and current employments, bonuses in March/April can hit 4-5k in CPF contribution. Bonuses in December can also hit 4-5k.

 

[kehyi4]

Your claims to (a) is inaccurate. Just happened for me in 2017 December contribution. Flows continue.

Your claims to (b) is also inaccurate. Wages can be flagged as "BONUS" by employer and the $2220 monthly limit does not hold. As examples from my previous and current employments, bonuses in March/April can hit 4-5k in CPF contribution. Bonuses in December can also hit 4-5k.

argh, it's so hard to discuss CPF on a forum, because of all the various complicated rules CPF has...

yes you are right for (b). CPF treats Ordinary Wages and Additional Wages separately. The $2220 limit applies only to OW, AW has no limit.

I was thinking of a situation where you earn consistently throughout the year, but it is possible to receive a humongous bonus in January (102k+ bonus!) and then no income for the rest of the year. in such a case, you will hit CPF AL in Jan, no need to wait until Dec

For (a), what I was trying to say is that when contributions from employment reach CPF AL, then any salary above that does not attract CPF. That was my experience. My total CPF contribution from employment has never exceeded CPF AL (no matter how much my salary exceeded)

I find it hard to imagine a case where contributions form employment (ie OW and AW, excluding other contributions not counted as employment) can manage to go above CPF AL. Can you perhaps show an example? I want to learn

 

[JuniorLion]

argh, it's so hard to discuss CPF on a forum, because of all the various complicated rules CPF has...

yes you are right for (b). CPF treats Ordinary Wages and Additional Wages separately. The $2220 limit applies only to OW, AW has no limit.

I was thinking of a situation where you earn consistently throughout the year, but it is possible to receive a humongous bonus in January (102k+ bonus!) and then no income for the rest of the year. in such a case, you will hit CPF AL in Jan, no need to wait until Dec

For (a), what I was trying to say is that when contributions from employment reach CPF AL, then any salary above that does not attract CPF. That was my experience. My total CPF contribution from employment has never exceeded CPF AL (no matter how much my salary exceeded)

I find it hard to imagine a case where contributions form employment (ie OW and AW, excluding other contributions not counted as employment) can manage to go above CPF AL. Can you perhaps show an example? I want to learn

For (a), even if you earn $50k a month, if your employer flags your wages as "ordinary", then you will always get $2220 per month.

However, if your income is variable and your employer flags $10k as Ordinary and $40k as bonus, then you can get a lot more than $2220 per month. If this happens every month, you can have crazy CPF contribution that year.

 

[kehyi4]

For (a), even if you earn $50k a month, if your employer flags your wages as "ordinary", then you will always get $2220 per month.

However, if your income is variable and your employer flags $10k as Ordinary and $40k as bonus, then you can get a lot more than $2220 per month. If this happens every month, you can have crazy CPF contribution that year.

yes, on a monthly scale, sure you can exceed $2,220 CPF contribution per month

but looking at it on a yearly scale, the Annual Limit applies, doesn't it? The max CPF you can get from employment (OW + AW) per year is ... $37,740, right?

Let's say you earn $10k a mth (OW) and 50k bonus (AW)
* max annual amount of OW liable for CPF is $6k x 12 = $72k
* max annual bonus that is liable for CPF would be 30k ($102,000 - OW)
* It all adds up to $102k per yr, which results in CPF contrib of $37,740 ($102k x 37%)

No matter what permutation of OW + AW we can come up with, the max amount that is liable for CPF would always be 102k ...

Your earlier post suggested that you managed to get an Annual CPF contribution that was higher than $37,740. Did i misunderstand you? If not, can you perhaps show the working that resulted in that? I'm asking because if what you say is correct, then it means my fundamental understanding of CPF AL is wrong, and i need to rethink several things...

I hope I'm not coming across as being argumentative here. That is not my intention i'm just trying to understand how CPF system works, to the best of my abilities