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Reduce Income Tax: CPF Retirement Topping-Up Scheme

31 Mar 2016 
SOURCE: Heartland Boy

​It is the tax season again whereby every dutiful Singapore contributes to nation building. Heartland Boy would like to introduce the CPF Retirement Topping-Up Scheme and the importance of it when filing for your income tax. Heartland Boy is confident that that almost every young working adult can take advantage of the CPF Retirement Topping-Up Scheme to immediately reduce his or her income tax expense.

 

How the CPF Retirement Topping-Up Scheme works

The CPF Retirement Topping-Up Scheme allows CPF members to build up their retirement nest by topping up your own or your loved ones’ accounts. The added beauty of this scheme is that members can also qualify for CPF Cash Top-Up Relief during the process, provided that the following criteria are met:

​Below 55​Use cash to top up your Special Account and that your cumulative CPF balances do not exceed the Full Retirement Sum*.
​Above 55​Use cash to top up your Retirement Account and that your cumulative CPF balances do not exceed the Full Retirement Sum*.

*As of 2016, the Full Retirement Sum is S$161,000. Note that cash top-ups beyond the current Full Retirement Sum will not be eligible for tax relief.

 

The amount of tax relief that you enjoy is the amount of cash that you contribute to your Special Account or Retirement Account (if you are above 55 years old), capped at S$7000 per annum. The CPF Retirement Topping-Up Scheme therefore allows you to reduce your chargeable income through tax relief, and eventually enable you to reduce your income tax expense.

 

Advantages of the CPF Retirement Topping-Up Scheme

Enjoy Tax Relief

  • The greatest advantage offered by the CPF Retirement Topping-Up Scheme is tax relief. Make full use of it when your accumulated CPF balances do not exceed the Full Retirement Sum yet.

 

Almost every young adult is eligible

 

  • Young working adults are especially eligible because it takes at least 5 to 6 years to exceed the Full Retirement Sum, assuming that your mandatory contributions are maxed out every year. Therefore, young working adults should make use of the CPF Retirement Topping-Up Scheme to reduce their income tax expenses. OKAY, even if you are that overachiever that managed to achieve the Full Retirement Sum within 5 years, you can still explore cash top-ups to your loved one’s Special Account/Retirement Account* up to the Full Retirement Sum to enjoy tax relief.

*Do note that even though you may have multiple loved ones, the total cash top-ups relief applicable is capped at S$7,000 per category per year.

 

Disadvantages of CPF Retirement Topping-Up Scheme

Cash is King

  • It is common to have the mentality that it is safer and better to always have cash by your side, especially in today’s volatile market. Therefore, cash top-up into your Special Account is truly a decision not to be taken lightly. Heartland Boy suggests that setting up an emergency fund should be the first financial goal of any young working adult, and only after this has been accomplished should cash top-ups into your Special Account be considered.
  • Even after setting up an emergency fund, some people still feel difficult to part with cash. Heartland Boy would then preach about the virtues of delayed gratification, and how “suffering” a little now would go a long way into having a better tomorrow.

Irreversible Process

  • Cash top-up into your Special Account is an irreversible process. Before the age of 55, savings in the Special Account cannot be withdrawn and utilized for any purpose, including paying off your housing mortgages.

Not utilized for computation to meet minimum sum for investment.

  • Cash top-ups to your Special Account cannot be utilized for computation to meet the minimum sum for investment. Currently, the minimum sum required in your Special Account is S$40,000, before you are allowed to use the excess balances for CPF Investment Schemes (CPFIS).

Heartland Girl Enjoyed Tax Relief via the CPF Retirement Topping-Up Scheme

In Heartland Boy’s previous article on transferring from Ordinary Account into Special Account, he also mentioned that Heartland Girl enjoyed tax relief via the CPF Retirement Topping-Up Scheme. Towards the end of 2015, Heartland Boy realized that Heartland Girl was on the verge of “upgrading” into a higher income tax bracket. As a result, Heartland Boy advised Heartland Girl to top up her Special Account with cash to enjoy tax relief and reduce her chargeable income. Furthermore, this cash top up made extra sense as she had less than S$60,000 accumulated balances in her CPF then. As a result, this additional deposit in the Special Account is now earning a guaranteed 5% per annum. Not too shabby indeed.

 

This article first appeared on Heartland Boy.

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