CPF Hacks you should be aware of

CPF

The CPF scheme was originally conceived as a Government assisted retirement contribution scheme. However, over years of reading blogs, you come across interesting ways people use it to achieve certain outcomes.

Here’s a collection of my favourite CPF Hacks that I feel everyone should know about.

Credits: Some of the ideas originate from A Singaporean Stocks Investor (ASSI), a veteran financial blogger who believes that CPF should be the cornerstone of your retirement.

Basic Hacks

1) When you contribute matters

Contributing in January or in December in any given year affects the eventual amount of interest you receive at year end. This is because of the way the CPF Board computes the amount of interest to pay its members.

CPF interest is computed monthly, then compounded and credited annually to your respective accounts. CPF interest earned in the preceding year will be credited to members’ CPF accounts by the 3rd working day in January.

Source: CPF FAQ

This means that you will earn 1 full year of compound interest if you contribute in January, versus 1 month if you contribute in December. So if you intend to contribute voluntarily to your CPF, do it as soon as possible.

2) Accrued interest and how you should handle it

Accrued interest is a controversial topic that contributed to the “Return My CPF” movement in prior years. Accrued interest is the concept that CPF monies withdrawn to fund a property purchase has to be returned to CPF with interest upon the sale of the property. This created a “Ownself pay ownself interest” scenario instead of the Government paying you the interest if you had left the CPF monies in your OA.

While I can understand that most Singaporeans cannot afford to own a home without using CPF funds, given the accrued interest issue, you should look to refund your CPF principal and accrued interest as soon as you are able so that you can let the Government compound your money, instead of doing it yourself. Or better, don’t use CPF monies at all to fund your home purchase.

3) Contribute voluntarily and save on tax

I have written on this in depth previously here and here.

Advanced Hacks

1) CPF as the bond component of your investment portfolio

Portfolio theory advocates that you should diversify your investments into different assets and asset classes to diversify away single asset risk. Bonds play a role in portfolio construction. Instead of buying government bonds that pay less or buying corporate bonds that are more risky (Hyflux 6% Perpetuals anyone?), ASSI advocates topping up your Special Account (SA) as a alternative. He views the CPF SA as a high interest up to 30 year bond backed by SG’s ironclad reserves.

Depending on your risk appetite, this might be a valid portfolio strategy.

2) Using your parents’ Retirement Account (RA) to earn higher interest

A ASSI reader came up with a pretty brilliant way of using her homemaker mom’s (i assume) RA account to earn high interest rates on her funds. As her parent’s RA is low, she can top up her parent’s RA without triggering CPF Life enrollment. This allows her top-ups to earn up to 6% interest. Plus, she can earn up to $7,000 in tax reliefs on her top-ups. She will ultimately receive back the funds by getting her mom to nominate her as the CPF beneficiary.

A pretty niche hack, but fascinating nonetheless.

3) CPF as a legacy planning tool

Did you know that any Singapore citizen can have a CPF account, including your new born baby? You only need to contribute to it for the first time for it to be opened.

So let’s say you want to leave a sum of money for your children to secure their future and are worried that they become snobbish little brats? You can either create a trust to manage the funds till they are of age. Or you can top up your child’s SA and let the Government be the gatekeeper like how this couple is considering. What’s more, the Government is helping your child compound the sum at 4% p.a. for 65 years!

4) Government subsidised medical insurance

As you might know, the Medisave account (MA) funds attract a 4% interest. You might also know that health insurance like the Integrated Shield plans can be bought using Medisave account funds. This effectively means that the Government is subsidising your medical insurance costs.

In fact, if your MA has the current Basic Healthcare Sum (the current MA balance cap) of $54,500, your annual interests from your MA would be at least $2,180. This should be sufficient to cover your health insurance costs.

As such, if healthcare and insurance costs is concerning to you, top up your MA to give yourself that necessary peace of mind.

Summary

The CPF can be a very versatile tool. From saving for retirement, to tax planning, to legacy planning and health insurance, CPF has a part to play.

Do you have any other CPF Hacks that you know and use? Do let me know in the comments!

Happy Hunting!
KK

Advertisements

Personal tax planning 4 – bringing it all together

Tax planning considerations

Welcome to the final part of my basic personal income tax planning series! In this series of posts I hope to cover the following topics:

  1. Tax reliefs
  2. CPF Cash Top Up
  3. Supplementary Retirement Scheme (SRS)
  4. Bringing it all together – How to best utilise these reliefs to your advantage

In this part, I will cover the considerations and general strategy I use to mitigate my personal tax bill.

General Strategy

The general strategy for tax planning is as follows:

  1. Maximise your family support reliefs
  2. Once those are maxed out, consider if further tax mitigation is necessary using retirement support reliefs.

The reason for this is that family support reliefs are always there every year as long as you qualify. If you don’t claim the reliefs, it is wasted. As for retirement support reliefs, there are real downsides to using those reliefs as identified in part 2 & 3. This mainly due to the long lock-up periods and irreversible nature of contributions. As such, you should only use these reliefs if you are fine with the money being locked away and that you are in a high tax bracket.

Family Support Reliefs

1) Maximising your family support reliefs

As talked about in part 1, knowledge is important in maximising your family support reliefs. A quick recap of common reliefs that you should consider claiming:

Reliefs everyone should be claiming

*Note that Working Mother Child Relief and Grandparent Caregiver Relief is only available to women

As a side point, for married women with children, you should definitely at least claim the working mother child relief as this is the government’s most generous tax relief at the moment, whereby you can potentially claim up to 100% of your earned income (depending on the number of children you have and whether you hit the $80,000 personal relief cap).

2) Allocation of family support reliefs

Some of the family support reliefs can be shared with your siblings / spouse, as such there is some potential for tax planning. From a tax efficiency standpoint, it is best to allocate reliefs to taxpayers who are in a higher tax bracket than taxpayers in a low tax bracket. (To me, low tax bracket refers to if your annual taxable income is $80,000 or less, as incrementally you pay a rate of 11.5% beyond that income level) This is because each dollar of tax relief gives rise to more tax savings in the hands of a taxpayer in a high tax bracket.

Tax efficiency

Of course, I understand there is a question of equality as you and your siblings/spouse may contribute equally to supporting your parents. As such, you might think that everyone should split the relief equally. All in all, this is something you should discuss with your family to achieve the most tax efficient and satisfactory outcome to all parties.

Retirement support reliefs

There are generally 4 considerations to make before deciding on which relief (CPF Cash top-up or SRS) to contribute towards:

  1. Availability of funds to lock-up
  2. Your incremental tax rate based on your taxable income after family support reliefs
  3. Your risk appetite
  4. The objective you hope to achieve with your contribution

1) Availability of funds to lock-up

You should only consider these reliefs if you are willing to not touch these funds for decades. If you foresee yourself needing the money for upcoming expenditure like a home or a wedding, you should not be considering contributions to your CPF or SRS.

2) Your incremental tax rate

Similar to allocating your family support reliefs amongst your family, you should consider if you are in a high or low tax bracket before contributing. If you are in a low tax bracket, it might be better to pay a small amount of taxes in order to retain the flexibility of your cash. After all, you are locking up a large sum of cash for minimal benefit.

3) Your risk appetite

Once you have considered point 1 and 2, you are ready to make your contribution of SRS or CPF. Choosing between the 2 very much depends on your risk appetite as CPF gives you a guaranteed 4% per annum return while SRS intrinsically only pays you the prevailing bank rate. This means that SRS contributions need to be invested in riskier assets in order to match or outperform CPF.

I currently use my meagre SRS funds in undervalued dividend paying stocks.

4)  Your objective

If you have a low risk appetite, it is likely you will choose to contribute to CPF. As mentioned in part 2, you have to decide if you wish to fund your retirement or your health insurance and contribute to your SA or MA accordingly.

Summary

Here’s a simple flow chart to illustrate my overall tax planning strategy:

Tax planning flowchart

Currently, due to me still being in a low tax bracket, I’ve not contributed to my CPF SA or MA. I have contributed to SRS in the past due to experimentation and it fitting my desire to invest. However, going forward, I have decided to stop contributing as well to retain flexibility over my funds.

And that marks the end of this 4 part personal tax planning series. Do you agree with my strategy? Do you have a better strategy for your own tax planning? I look forward hearing to your suggestions.

Happy Hunting,
KK

PS: IRAS Corporate Communications reached out to me with some useful infographics to share with you guys. I’ve updated part 1 to include those infographics for your benefit.

Personal tax planning 2: CPF Cash Top-up

Summary

Welcome to part 2 of my basic personal income tax planning series! In this series of posts I hope to cover the following topics:

  1. Tax reliefs
  2. CPF Cash Top Up
  3. Supplementary Retirement Scheme
  4. Bringing it all together – How to best utilise these reliefs to your advantage

In this part, I will cover how topping up your CPF can be used as a tool to mitigate your tax bill. As mentioned in Part 1, there are 2 ways to top up your CPF to obtain reliefs:

  1. Top up your / your family member’s Special Account (SA) / Retirement Account (RA)
  2. Voluntary contributions to your Medisave Account (MA)

Topping up of SA / RA

The Retirement Sum Topping Up Scheme (RSTU) allows you to top up your / your family member’s SA / RA with cash gives you a dollar for dollar tax relief of up to $14,000 ($7,000 for your own account, $7,000 for your family member’s account). The amount of relief you will obtain is subject to the following limit on cash top-up as well:

SA Cap.JPG

Source: IRAS

The current FRS for 2018 is $171,000, this cap will be readjusted annually until you turn 55.

Do note that tax relief for topping up your spouse or sibling’s SA / RA is only applicable if he / she had $4,000 or less income (including tax exempt income like interest and SG dividends) in the Year of Assessment.

Voluntary contributions to your MA

There are 2 ways to perform voluntary CPF contributions annually:

  1. Contribute generally to your CPF OA, SA and MA accounts in accordance with prevailing allocation rates.
  2. Contribute specifically to your MA.

The advantage to contributing specifically to your MA vs general voluntary contributions is the dollar for dollar tax relief given for contributing to your MA. The amount of tax relief is limited to the lowest of the following:

  1. Voluntary cash contribution to your MA; or
  2. Annual CPF contribution cap (currently $37.740 p.a.) less mandatory contributions
  3. Prevailing Basic Healthcare sum (currently $54,500) less MA balance before voluntary contributions

Pros and Cons of Contributing to your CPF SA / RA / MA

Topping up your CPF accounts is non-refundable and you should take the requisite time to weigh the following before acting:

Pros and Cons

Some people say that you can view your CPF SA and MA contributions as investing in a 30 year Government Treasury yielding minimum 4% and they do it in place of the bond component in their investment portfolio. For me, I’ve yet to voluntarily contribute to my CPF as I’m not at a high income tax bracket currently and I wish to retain the flexibility of capital to deploy opportunistically. Whether you choose to contribute or not is very much dependent on your tax situation and risk appetite. I will elaborate on this in my final post of this series.

Contribute to SA or MA?

There is no specific advantage of topping up your SA over contributing to your MA as both earn 4% in interest p.a. and both give the same amount of dollar for dollar relief (subject to caps). It depends on your personal preference, bearing in mind the purpose of the SA and MA.

The SA is set up specifically for your retirement. You can use the funds for the CPF Investment Scheme (CPFIS) if you have a minimum balance of $40,000 if you choose to. When you turn 55, the FRS is deducted first from your SA and if insufficient, then from your OA. The funds are transferred to your RA to fund CPF Life.

The MA is used mainly to help fund healthcare costs and pay for Medishield Life and your Integrated Shield plans. The money will stay there and not be used to fund your retirement, be it via cash withdrawal at 55 or to fund CPF Life.

As such, ultimately you have to decide for yourself – fund my retirement or fund my medical / insurance bills?

Conclusion

Contributing to your CPF is a tool you can use to mitigate your tax bill with some planning. It has however, many facets to consider prior to contributing, over and beyond just tax benefits. I will discuss how to best utilise this tax relief in the final post of this series.

Till my next post in this series on the Supplementary Retirement Scheme.

Happy Hunting,
KK

Personal tax planning 1: Tax reliefs

Tax-Relief.jpg

Welcome to my basic personal income tax planning series! In this series of posts I hope to cover the following topics:

  1. Tax reliefs
  2. CPF Cash Top Up
  3. Supplementary Retirement Scheme
  4. Bringing it all together – How to best utilise these reliefs to your advantage

This series of posts assumes that you understand the basic concepts of income tax and personal reliefs as well as the filing requirements. If you are new to income tax, I recommend that you go through the information on the IRAS website which provides a basic overview of things.

Know your personal reliefs

I’ve come across some friends that doesn’t even bother to fire up the IRAS myTax Portal every year to at least take a look at their tax filing, let alone adjust their filings. To that I say thank you for your outsized contribution to nation building! 😝

Let’s be clear, tax planning is not tax evasion. It’s about efficiency and paying your fair share. And knowing your reliefs is a large part of that. IRAS has done up a pretty nifty relief eligibility tool, I encourage you to play around with it and learn more about the various reliefs available. Who knows, maybe you could save some taxes in the process.

The reliefs I’ll be covering are those that require action on your part to qualify for (be it to proactively elect to claim the relief or perform the requirements), as if you do not even know the relief exists, you might not act in the first place. Generally I’ll be classifying them into 2 categories – family support and retirement / career support.

Family support reliefs

Generally this class of reliefs reflects the Government’s attempt to incentivise working Singaporeans to help support their family members in their old age or handicapped condition, or to have more children. This class of reliefs require you to elect to claim this relief in your annual tax filing and are more binary in nature (ie either you qualify or you don’t), resulting in limited tax planning opportunities.

Here is a summary of the available reliefs:

Family support reliefs

1 – Depends on whether the dependent stays with you
2 – Depends on whether the dependent is handicapped

Here are some infographics provided by IRAS for sharing with you guys:

More Tax Savings for Families

Child-Related Reliefs

Parent Relief

Generally if you are supporting a child, parent, grandparent, in-law, grandparent-in-law or spouse, you probably qualify. These reliefs generally have conditions like whether the dependent stays with you, or if you have incurred $2,000 in the YA to support these dependents who don’t stay with you, or if they have <$4,000 income in the past year. Some of the reliefs can be shared with your siblings or spouse so there’s some planning you need to discuss with your siblings / spouse. For more information on the conditions, I refer you to the relief eligibility tool from IRAS linked above.

The great thing about these reliefs is that once you claim it in one year, IRAS automatically applies it to your subsequent years’ tax filings. So going forward if nothing changes, you do not need to adjust your reliefs again.

I will talk a bit more about how to best utilise these reliefs in the last post of this series.

Retirement / Career support reliefs

This class of reliefs are the Government’s way to incentivise Singaporeans to upgrade yourself and take charge of your retirement. These reliefs require you to proactively do something to qualify for the relief. As a result, these reliefs have greater flexibility for tax planning purposes.

There are 3 reliefs I will cover in this section:

  1. Course fee relief
  2. CPF Cash Top-up relief / CPF relief
  3. Supplementary Retirement Scheme relief

Course fee relief

This relief allows you to claim up to $5,500 per year in tax reliefs for courses you have taken that will lead to a professional / vocational qualification or are relevant to your current or new employment. This does not cover courses you take for fun (RIP cooking courses) or general skills (RIP Microsoft Office courses). You can also choose to defer the claims up to 2 years (the earlier of 2 years or the year you have an assessable income >$22,000) if your assessable income is less than $22,000 in the year you incur the costs.

Pretty straight forward relief, nothing much to add. Just remember this relief when you go for professional courses and keep the invoices or records for this relief when you claim it, in case IRAS audits you.

CPF Cash Top-up / CPF Relief

There are 2 ways you can voluntarily top up your CPF account to get tax reliefs:

1. Top up your / family member’s Special Account / Retirement Account

You can voluntarily top up your own or your family’s Special Account (if you are under 55) or Retirement Account (if you are over 55) and get a dollar for dollar tax relief of up to $14,000 per year ($7,000 for your own accounts, $7,000 for your family members’).

2. Top up your Medisave Account

You can voluntarily top up your Medisave Account and get a dollar for dollar tax relief.

The CPF Board will automatically notify IRAS of the voluntary contributions you have made to the respective accounts. Do note that there are caps on topping up your Special / Retirement / Medisave Account, which I will cover in greater detail in my next post.

Supplementary Retirement Scheme Relief

Supplementary Retirement Scheme (SRS) is a voluntary scheme that the Government hopes to encourage Singaporeans to save over and beyond the CPF for retirement. It is a account you can open with any of the 3 local banks and contributions are given a dollar for dollar tax relief. The funds deposited can be used for investment purposes. Do note that there is a annual contribution cap of $15,300 per year.

SRS relief is automatically credited to you annually as your bank will notify IRAS of your annual contributions. I will cover this scheme and its key considerations before you contribute in greater depth in my 3rd post of this series.

Summary

Knowing your reliefs is important if you wish to perform some tax planning to mitigate your annual tax liability. I’ve given you a brief overview of the various reliefs that are not automatically claimed. For more in-depth explanations on the qualifying criteria, you can visit the IRAS website.

Till my next post on the CPF Cash Top-up Relief.

Happy Hunting,
KK

Gahmen assisted Retirement

A seismic event occurred yesterday that most Singaporeans don’t know / don’t care / don’t give a beep about.

GAHMEN GAVE YOU MONEY

Where Got.jpg

Don’t believe me? Check your CPF lor…

Yes, your annual CPF interest was credited into your CPF account yesterday. I checked my account and I received roughly $2.6k, up from $1.6k in 2016 after some optimising done on my part this year.

CPF is a topic that has been much debated and raged about in recent years following Roy Ngerng’s rant on it (RETURN MY CPF!). For me, why debate the legality, efficacy, etc etc of the policy when what you should be doing is trying to work the system to your advantage as much as possible? If the Gahmen wants to give you higher than bank interest on your money, I’ll say thank you and run.

CPF is very much a topic I would like to cover in the future on this blog as I think it is a huge lost opportunity if you don’t fully understand it. For now, break out your SingPass and marvel at the riches that you can only unlock at age 55. 😛

Are you satisfied with the amount of interest the Gahmen paid you?

Happy Hunting,
KK