Question on topping up CPF

[ctan84]

Hi, Im looking at topping up my CPF SA for 1) tax rebate purpose & 2) for the FRS. Am a bit confused if it can be done becoz CPF website states CPF annual contribution limit is $37400 & Im very near to that. But its also stated that if my FRS has not been met, Im still allowed to top up.

So which is which? Can I still top up the $7k to get the tax rebate?

 

[BBCWatcher]

Yes, you can top up your Special Account in any amount up to the Full Retirement Sum. The CPF Annual Limit does not apply to SA or RA top ups.

Yes, the first $7,000 (per calendar year) may be eligible for tax relief -- and up to another $7,000 of tax relief when you top up a qualified family member's SA or RA. But those are not top up limits either; they're just the tax relief limits.

 

[ctan84]

Yes, you can top up your Special Account in any amount up to the Full Retirement Sum. The CPF Annual Limit does not apply to SA or RA top ups.

Yes, the first $7,000 (per calendar year) may be eligible for tax relief -- and up to another $7,000 of tax relief when you top up a qualified family member's SA or RA. But those are not top up limits either; they're just the tax relief limits.

THanks for the prompt reply. Just a quick question: is it wise to top up the max amount for SRS account too for tax relief purpose? Then put the amount in SRS into SSB? Let's say its for someone with a rather low risk appetite when it comes to investing.

 

[BBCWatcher]

Just a quick question: is it wise to top up the max amount for SRS account too for tax relief purpose? Then put the amount in SRS into SSB? Let's say its for someone with a rather low risk appetite when it comes to investing.

The 4% obtainable with Special Account top ups, even without tax relief, ends up much better than the ~2% obtainable with SSBs in SRS accounts even with tax relief. So between those two choices I’d deposit dollars into SA first, all the way up to the FRS.

The caveat of course is that SA dollars are dedicated to retirement while SRS dollars are also but could be withdrawn prematurely with a significant tax penalty. But you’re very much better compensated for the firmer commitment to retirement savings.

 

[ctan84]

The 4% obtainable with Special Account top ups, even without tax relief, ends up much better than the ~2% obtainable with SSBs in SRS accounts even with tax relief. So between those two choices I’d deposit dollars into SA first, all the way up to the FRS.

The caveat of course is that SA dollars are dedicated to retirement while SRS dollars are also but could be withdrawn prematurely with a significant tax penalty. But you’re very much better compensated for the firmer commitment to retirement savings.

That means I have to calculate if the tax relief I get from putting into SRS is more worth while than putting into SA. I get taxed quite harshly becoz of my income bracket, so was thinking of using the 7k SA top up + $15k SRS contribution to get the max tax relief.

 

[K_E_N_L_A_W]

I suggest that you top up your medisave first if it's not max before going to SA and SRS.

 

[BBCWatcher]

That means I have to calculate if the tax relief I get from putting into SRS is more worth while than putting into SA. I get taxed quite harshly becoz of my income bracket, so was thinking of using the 7k SA top up + $15k SRS contribution to get the max tax relief.

Unless you’re going to retire “tomorrow” (metaphorically), the 4%/year interest (SA) will fairly quickly outrun the 2%/year interest (SSBs in SRS), overtaking the latter’s tax relief before too long.

VERY roughly, look at your marginal tax bracket (e.g. 7%) then divide by 2, to reflect the ~2 percentage point gap between these two choices. That’ll tell you very roughly how many years it’ll take for the SA top up to pull ahead and leave the SSB in SRS in the dust.

I suggest that you top up your medisave first if it's not max before going to SA and SRS.

As a generalization I agree with this advice, but be aware that MediSave top ups must fit within the CPF Annual Limit and the Basic Healthcare Sum. But they do qualify for tax relief, provided they are top ups into your own account and you otherwise qualify (haven’t reached the annual overall tax relief limit, still have income that would be taxed).

 

[tkdboi]

THanks for the prompt reply. Just a quick question: is it wise to top up the max amount for SRS account too for tax relief purpose? Then put the amount in SRS into SSB? Let's say its for someone with a rather low risk appetite when it comes to investing.

I am doing the same. However the amount in SRS I use to do DCA in STI instead, which I do not have in other parts of my portfolio

Sent from Samsung SM-G975F using GAGT

 

[BBCWatcher]

VERY roughly, look at your marginal tax bracket (e.g. 7%) then divide by 2, to reflect the ~2 percentage point gap between these two choices. That’ll tell you very roughly how many years it’ll take for the SA top up to pull ahead and leave the SSB in SRS in the dust.

Let's improve on this very rough calculation. Let's suppose your marginal income is all within the 15% tax bracket and you have an additional $10,000 on an after tax basis to save. You're trying to decide between your Special Account and a Singapore Savings Bond in your SRS Account. (Let's assume here you cannot make a MediSave Account top up because it would bust the CPF Annual Limit, so that's off the table.)

I'm also going to assume that you're willing to take the future income tax savings and apply it to your immediate SRS Account deposit, and let's also assume a 2.0% interest rate on your Singapore Savings Bonds, net of costs ($2 transaction fees) and with reinvested coupons.

OK, here's what the Special Account deposit would look like over the next 10 years:

Year 0: $10,000.00
Year 1: $10,400.00
Year 2: $10,816.00
Year 3: $11,248.64
Year 4: $11,698.59
Year 5: $12,166.53
Year 6: $12,653.19
Year 7: $13,159.32
Year 8: $13,685.69
Year 9: $14,233.19
Year 10: $14,802.44

And here's what the SSB in SRS Account deposit would look like over the same 10 years:

Year 0: $11,500.00
Year 1: $11,730.00
Year 2: $11,964.60
Year 3: $12,203.89
Year 4: $12,447.97
Year 5: $12,696.93
Year 6: $12,950.87
Year 7: $13,209.89
Year 8: $13,474.08
Year 9: $13,743.56
Year 10: $14,018.44

The "back of the envelope," very rough calculation suggests you take the marginal tax rate (15%) and divide by the yield gap (2.0) to arrive at the number of years to reach "break even" between the two scenarios. So in this case the rough calculation suggests that the Special Account will start to pull ahead (and stay ahead) of the SSB in SRS after 7.5 years. And the more careful calculation backs up the rough calculation: the crossover point is at 7.X years. (A little closer to 7 than to 8, due to compounding effects.)

Sure, tax savings are nice, but as this example shows they're not all important. And really we've been a little too generous to the SSB in SRS choice, because we've pulled the future tax savings to the present. When you make a decision to get tax relief, the tax savings actually occurs sometime next year. If we're even more careful and fair then we'd put that $1,500 (15%) of tax savings into a separate SRS deposit the following year, but this is close enough.

Also, it's not a given that your SRS withdrawals will be tax free. They may not be. In this comparison we've implicitly assumed they will be.