Topping up our CPF accounts as a retirement strategy should be no surprise to regular DollarsAndSense readers. We have previously written about Topping Up Your CPF MediSave Or Special Account – Which Makes More Financial Sense? as well as the Pros and Cons of Topping Up Your CPF MediSave Account.
We have also discussed when is more opportune to make our CPF top-ups – Should You Make Lump Sum Top-Ups Or Regular Contributions For The CPF Retirement Sum Topping-Up (RSTU) Scheme.
However, with the changes to CPF top-ups being implemented in 2022, this final month in 2021 may be the time to consider maxing out your MediSave if you have the means to do so.
MediSave Top-Ups Will Change in 2022
The changes to MediSave top-ups are largely positive: recognising the giver of the top-ups for tax relief makes more intuitive sense and simplifying the tax relief for MediSave top-ups to the $8,000 limit is straightforward for most people.
However, for those who are maximising their CPF accounts, these changes may actually reduce the tax deductions you receive for your MediSave top-ups.
You May Be Able To Top Up More To Your MediSave In 2022
This maximum limit for MediSave top-up in 2021 is the difference between the CPF Annual Limit ($37,740 in 2021) and the mandatory CPF contributions made for the calendar year. This is then subject to the limit of our BHS. For CPF members turning 65 in 2021, the BHS is $63,000.
|Maximum Limit For MediSave Top-Up||CPF Annual Limit ($37,740 in 2021) minus mandatory CPF contributions made for the calendar year. The amount cannot exceed limit of our BHS||Basic Healthcare Sum minus our MediSave balance.|
|Maximum Tax Deduction For MediSave Top-Ups||Top-Up Amount||$8,000 (including top-ups made under RSTU).|
Assuming someone in their mid-30s to mid-40s is earning a monthly wage of $4,500, their mandatory CPF contributions would amount to $19,980. We also assume that this person has a MediSave balance of $30,000
Under the current 2021 CPF policy, assuming the BHS of $63,000 and the mandatory CPF contributions of $19,980, the maximum MediSave top-up amount is $17,760 ($37,740 minus $19,980). As this top-up would not cause our MediSave balance to exceed the BHS, the BHS limit does not apply. This amount of $17,760 is fully tax-deductible, subject to your overall personal income tax relief cap of $80,000.
From 2022, the maximum MediSave top-up amount would be the BHS minus our existing MediSave balance. Assuming that the MediSave balance is $30,000, the maximum top-up allowed is $33,000 ($63,000 minus $30,000). Note: this assumes the BHS remains at $63,000 in 2022. The maximum tax relief for the $33,000 MediSave top-up would be capped at $8,000.
The Tax Relief For MediSave Top-Ups Will Be Capped In 2022
Although from 2022, we would be able to top up more to our MediSave account, the tax deduction we would receive is much lesser.
Currently, MediSave top-ups and RSTU top-ups receive separate tax deductions. The limit for tax relief for RTSU is capped at $7,000 in 2021 and the limit for tax relief for MediSave top-ups is capped by the limit at which you can top-up your MediSave (subject to your personal tax relief of $80,000).
From 2022, the tax relief for both MediSave and RSTU top-ups is a shared cap of $8,000.
For people who have been maximising out their annual RSTU tax relief ($7,000 in 2021) and making separate MediSave top-ups, this change would reduce the maximum amount of tax relief they can receive if they have been making more than $1,000 top-ups to their MediSave account.
Based on the above assumption of a $17,760 maximum top-up, a person topping up MediSave in 2021 can enjoy $17,760 in tax relief and another $7,000 tax relief if they also make their maximum RSTU top-up eligible for tax deduction. However, if they make the same top-ups in 2022, they would only receive $8,00 tax relief.
Maximise Your Tax Deductions By Maximising Your MediSave Top Up This Year
If you have been contemplating maxing out your MediSave (and have the available funds to do so), it may be worth doing so this year before the 2022 CPF changes kick in. However, if the tax relief is less important to you, you would likely be able to top up more in 2022.
Regardless, 2022 would be a good time to start topping up the MediSave accounts of your loved ones as the tax relief would apply to the giver instead of the recipient.
If you are still considering whether to top-up your MediSave account, read more about the Pros and Cons of Topping Up Your CPF MediSave Account.
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