Voluntary Contribution (VC) to CPF Medisave for Tax Reduction

I previously blogged about using SRS and CPF RSTU (CPF SA) but yet to blog on tax reduction using voluntary contribution (VC) to CPF MA. Since I just top up, might as well take some screenshot and show how it is done :)

Calculate YTD CPF Contribution
Firstly, the amount that one can contribute/top-up is subjected to the CPF Annual Limit which is $37,740 now. Even if one were to top-up more, it will be refunded (without any interest) but you wouldn't want that to happen right?

Log in to your CPF, click on "My Statement" on the left side of the menu. Scroll down to "Section B", select "Contribution History" specifying the start of the year till the latest month and you will be presented with all your CPF contributions year to date. The number one can afford to top up will be the CPF Annual Limit minus off the total CPF contributions for the year.

Voluntary Contribution (VC) to Medisave
Once you are ready to top-up, click on "My Requests" followed by "Building Up My/My Recipient's CPF savings" and look for "Contribute to my Medisave Account via PayNow or eNets".

Next, you will be redirected to the following page with the selected option - "Contribute to my Medisave (Tax deductible)". Click on "Next".

You will be shown some important things to note as well as the relevant T&Cs. Make sure you read through because the process is irreversible. Accept the T&Cs and click on "Start".

You will be prompted for your contact number as well as the amount you want to contribute. Right at the bottom, there is this button that allows you to "Check Allowable Contribution".

If you were to contribute based on that, there is a high chance you would have over contributed...

At least based on my observation, my CPF is always "late/delayed" by one month. The CPF for my November salary will only be credited on December, hence the allowable contribution is lacking/not updated with one month of contribution.

I have created a spreadsheet/calculator which I felt is more accurate and you can play with it here - Voluntary Contribution (VC) to Medisave for Tax Reduction Calculator.

Anyway, once you enter the amount you would like to contribute, you will be shown a PayNow QR code. Simply use your mobile ibanking app to scan it, initiate the PayNow transfer and it will be reflected in your CPF Medisave account almost immediately!

Like I have mentioned before, besides looking at it from a tax saving/reduction point of view, one can also look at it from an investment point of view. The dollar tax savings can be treated as a return on investment/dividend. The ROI would be equivalent to your income tax rate + a guaranteed 4% capital growth (SA/MA interest) year on year.

Hope this helps!

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CPF RSTU - Is It Worth It?

We are close to the end of the 2017 year and have worked for almost another year. In a few months time, we will be thanked "for our contribution towards nation building". lol. I am referring to the income tax.

NOA Sample from HDB

I have been thinking if I should be doing a CPF RSTU (Retirement Sum Top Up) to lower my tax. It is interesting to see how the facebook finance communities (Seedly Personal Finance Community (SG) and BIGS World - Build Wealth, Live a Good Life) advocates topping up of CPF as compared to my random conversations with my colleagues who almost all showed disgust towards doing it. My colleagues would look at it as though I am crazy and say something along the line of "topping up of CPF is one-way direction, you will never get it out". I would not argue with that statement because it is true to a certain extent.

I double confirm with CPF Board via Facebook messenger and gave them a hypothetical question to ensure that my understanding is correct. As you can see, one will be able to withdraw any amount in excess of FRS (Full Retirement Sum). Based on my FRS forecast, it will probably be around $300,000 when we are 55 years old (28 years later) assuming the FRS continues to increase at a 2-3% rate. I am pretty confident I will be able to exceed FRS if I continue to work and the policy does not change again. lol. My previous article on CPF Milestone ($40k in Special Account) and The Power of Compound Interest assumes that even if I stop working now and do nothing, the SA would have grown to $141,000.

As usual, KPO starts punching various numbers into Google Spreadsheet... The numbers generated are based on KPO's profile who has an earned income $1,000 relief and an NSman $3,000 relief which is group under "Other Reliefs". You can download the spreadsheet and modify the numbers to fit your profile.

The taxable/chargeable income is calculated by deducting the 20% CPF employee contribution and other reliefs against the total annual salary + bonus. The income tax rate would differ accordingly based on the taxable/chargeable income. You can refer to IRAS income tax rates for more information.

A $7,000 CPF RSTU would lower the taxable/chargeable income. When the stars are aligned, one can even have a 100% tax savings! lol. Having said that, it is definitely not feasible when we look at the below table. The amount $7,000 is relative to one person income. To enjoy that $80/100% tax savings, he would have to contribute 25% of his take home pay.

Besides looking at it from a tax saving point of view, one can also look at it from an investment point of view. The dollar tax savings can be treated as a return on investment/dividend. The reason is that I would probably use the $7,000 to buy stock and continue to grow our portfolio. From an investment point of view, the ROI would be equivalent to your income tax rate (most of the time except when you suddenly belongs to a lower tax bracket). On top of that, there is also a guaranteed 4% capital growth (SA interest) year on year. Hence, your guaranteed return for the first year would be your tax rate + 4% interest. The higher your income tax, the higher the return, the lesser it affects your cash flow (take home pay) which is limited to the CPF Annual Limit of $37,740.

To be honest, I have no idea where/how one can find such a high return, risk-free investment elsewhere. The market return may be higher but it is definitely not guaranteed. With this numbers, I am pretty sure what I will be doing. So is it worth it? It depends. Hahahaha. If someone says it is good, it doesn't necessarily mean that it is good for you, you got to make the decision yourself.

You can download a copy of the spreadsheet here - CPF RSTU. Have fun with the spreadsheet and I hope it helps in your tax planning/investment!

Do like any of the following for the latest update/post!
1. FB Page - KPO and CZM
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3. Click here to subscribe using email :)
4. Instagram - KPO_and_CZM (Did you see those delicious food photos to the right -->)