Topping up our CPF accounts is one way Singaporeans and PRs can build up their retirement savings, and still enjoy tax relief at the same time.
Most of us may also realise that understanding all the various CPF schemes is no walk in the park. Even CPF experts, such as some of the writers from DollarsAndSense who write regularly about CPF, can sometimes misunderstand schemes.
To avoid making mistakes when topping up our CPF accounts, or those of our loved ones, we highlight 3 possible mistakes that we may make when topping up our CPF accounts.
#1 Contributing To All Three CPF Accounts, Instead Of Making A Top-Up To Our CPF Special Account Or Retirement Account
If we intend to top-up our CPF Special Account to build up savings for our retirement under the Retirement Sum Topping-Up Scheme (RSTU), we should be topping up our Special Account (under 55) or Retirement Account (55 and above).
Doing so ensures that our cash top-ups are credited directly to the right account that allows us to earn us a base interest rate of 4.0% p.a. In addition, we also enjoy tax relief of up to $7,000 when topping up our CPF SA/RA, and another $7,000 if we top up our family member’s CPF SA/RA.
One mistake to avoid is to accidentally contribute our cash top-ups to all three CPF accounts – Ordinary Account, SA/RA, and MediSave Account, instead of just our SA/RA.
If we contribute to all three accounts, funds are allocated according to the current CPF allocation rate based on our age. This means instead of building up our retirement nest egg in our Special or Retirement Account, we will also be contributing to our Ordinary Account and MediSave Account.
#2 Not Getting Tax Exemption For RSTU Top-Ups Because We/Or Our Parents Already Reach The Full Retirement Sum
As mentioned above, through the Retirement Sum Topping Up Scheme (RSTU), we can enjoy tax relief of up to $7,000 if we top-up our CPF SA/RA Account, and another $7,000 in tax relief if we top-up our loved ones CPF SA/RA. For those paying income tax, this gives us a financial reason to contribute to our retirement and save on our tax bill at the same time.
For CPF members below 55, the maximum top-up that CPF will allow us to make to our Special Account is the Current Full Retirement Sum (FRS) – Special Accounts (SA) savings – Net SA savings withdrawn under the CPFIS.
For example, assuming someone who is below 55 today.
|Full Retirement Sum (FRS) as of 2021||$186,000|
|Current Savings in SA (inclusive of any amount withdrawn from SA for CPFSA investments)||$176,000|
|The maximum amount they can be top-up to their SA in 2021||$10,000|
In the scenario above, the maximum amount that can be topped up will be $10,000. For those below 55, we cannot top-up a person’s SA beyond the FRS.
For those above age 55, top-ups can be made up to the current Enhanced Retirement Sum. This is currently $279,000 as of 2021. For example, if your parent is 60 and currently has $200,000 in his/her CPF RA, this means that a top-up of up to $79,000 can be done via the RSTU.
However, one thing to note is that there are no tax benefits for top-ups made beyond the Full Retirement Sum. This means if our parent’s RA has already exceeded the FRS ($186,000), but they have not hit the Enhanced Retirement Sum yet ($279,000), we can still top up their CPF RA – up to the Enhanced Retirement Sum – but cannot claim any tax relief on the amount that we top up.
#3 Making Voluntary Contribution (VC) As A Self-Employed Person But Not Getting Tax Relief
Another contribution mistake to avoid is making Voluntary Contribution (VC) to our CPF accounts as a self-employed person (SEP), but not enjoying any tax relief on our contributions.
Self-employed persons (SEPs) are only required to make mandatory contributions to their MediSave Account if they have a yearly net trade income of more than $6,000. Net trade income refers to our gross trade income minus all allowable business expenses, capital allowances, and trade losses.
For example, depending on their age, a SEP who earns $36,000 a year will need to make mandatory contributions to their MediSave Account of between $2,880 to $3,780. This amount that is contributed will enjoy tax relief.
However, assuming we are a SEP but our assessed net trade income for the year is zero or negative (for example, the business that we are running as a sole prop didn’t make money in 2020). In this instance, we do not need to make any mandatory contribution to your MediSave Account.
However, SEPs may still believe that it’s important to plan for their future. Thus, we may decide to make a voluntary contribution to your MediSave or all three CPF accounts. In this instance, we won’t enjoy any tax relief.
At this point in time, we may wonder why this matters? After all, if a SEP’s net trade income is zero or negative for the year, then it means they won’t need to pay any taxes in the first place. This isn’t necessarily true.
A person can be both an employee and a SEP at the same time. For example, there are people who hold well-paying, full-time jobs during the day and run a side-hustle at night. Such individuals may want to optimise for tax savings as much as possible.
For example, Alex has a full-time job that pays him $100,000 a year. Concurrently, he has been running his own e-commerce company under a sole proprietorship. While he usually makes money from his e-commerce company, his net trade income for 2020 was zero. So even though Alex’s net trade income for 2020 is zero, he would still be liable for income tax due to his salary from his full-time job.
In most years, Alex makes voluntary contributions as a self-employed because it helps him reduce his overall tax bill. However, for 2020, making voluntary contributions as a self-employed won’t help him reduce his tax bill because his net trade income for the year is zero.
Similarly, even if our NTI is positive, there is also a cap to how much tax relief we can claim as a SEP.
This isn’t to say that contributing to our CPF account is a bad idea if we can’t claim tax relief. For those who have spare cash and want to plan for their future via CPF, we can still contribute to our CPF accounts. However, we should not assume that doing so will automatically allow us to enjoy tax relief.
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