4 Types of CPF Savings Top-up

By The Boy Who Procrastinates - December 18, 2020

2020 has been a year marked by fear and uncertainty and we are finally concluding it in a few weeks' time. As the year comes to an end, it is reasonable to start looking for ways to reduce tax bills for the Year of Assessment 2021. 

One option for tax deduction is to look no further than our own pension system, CPF. In addition to tax planning, it offers an avenue to grow retirement funds reliably, especially in the chaotic world we live in.

There are 4 different ways that you can top up your CPF savings which are categorized under the branches of Voluntary Contribution (VC) and Retirement Sum Topping-Up Scheme (RSTU) as follows: 

Source: Are You Ready? by CPF Board

1. VC - Topping up Medisave with Cash

The benefits of making voluntary cash contribution to the Medisave Account (MA) has been discussed in details previously

A taxpayer is allowed to claim tax relief for voluntary Medisave contribution. The amount of tax relief is, however, subjected to the annual CPF contribution cap of $37,740 and the Prevailing Basic Healthcare Sum (BHS) of $60,000.

It should be noted that the tax relief is claimed by the recipient of the Medisave top-up. For example, if you make a voluntary cash contribution to your parents’ Medisave on their behalf, they will be entitled to the tax relief instead, subjected to their CPF contribution limit.  

Being a national medical savings scheme, Medisave can be used for various healthcare related expenses, as well as to pay for the premiums of MediShield Life, Integrated Shield Plans (ISP) and the newly launched CareShield Life. 

MA has a lower ceiling which makes it relatively achievable to reach the maximum balance. Once your MA has reached the BHS, any excess contribution will flow to your Special Account (SA), or Ordinary Account (OA) if SA has reached the prevailing Full Retirement Sum (FRS).

Source: CPF Website

Suitable for:
  • Young CPF members who have yet to reach the BHS and the CPF annual contribution cap and are looking to reduce income tax expense.
  • CPF members who would like to help their parents build their medical savings funds

    Qualifies for tax deduction (for recipient only)
    Great flexibility for the use of MA funds
    Funds in MA earn 4% interest rate annually 

     Low BHS Ceiling 
     Limited by Annual CPF Contribution Cap 

2. VC - Topping up 3 CPF Accounts (OA, SA, MA) with Cash

Commonly known as VC3A, voluntary contribution to the 3 CPF accounts will be allocated based on the CPF allocation rates expressed as ratios of contribution (ie. converted to 100%). For example, about 62% of the VC will go into OA for working adults under the age of 36. 

As VC cannot be made solely to the OA, the VC3A method is considered to be the only way for CPF members looking to boost their OA savings, other than through mandatory CPF contribution. 

The maximum amount of VC one can make to the 3 CPF accounts is limited by the CPF Annual Limit which comprises of the mandatory CPF contribution made by employee and the employer in a calendar year. Any voluntary contributions made in excess of the CPF Annual Limit will be refunded without interest.

Unlike VC to Medisave, it should be noted that the VC3A method does not qualify for tax deduction. 

Suitable for:
  • CPF members looking to grow their OA balance for housing needs
  • Self-employed who prefer to take advantage of the stable interest rate

    The only voluntary method to increase OA balance
    Great flexibility for the use of OA funds for HDB purchase, education payment, etc

     Does not qualify for tax deduction 
     Limited by Annual CPF Contribution Cap
     Majority of VC goes into OA which earns 2.5% interest rate annually

3. RSTU - Topping up Special Account with Cash

The RSTU allows one to top up the Special Account up to the current Full Retirement Sum (FRS) of $181,000 for recipients below the age of 55. 

For recipients aged 55 and above, the top-up will go to the Retirement Account up to the current Enhanced Retirement Sum of $271,500.

For the purpose of tax planning, RSTU is not bounded by the annual CPF contribution limit and the tax relief is not strictly claimed by the recipient (unlike VC to Medisave)

The amount of tax relief that one can enjoy is equivalent to the amount of cash top-ups made, capped at $7,000 per calendar year. If cash top-ups have also been made for your loved ones (e.g. parents, grandparents), you can enjoy additional tax relief of up to $7,000 per calendar year. 

One disadvantage of RSTU is that the the top-up monies (along with accrued interest) cannot be utilized for CPF Investment Scheme and does not count towards meeting the Basic Retirement Sum (BRS). 

Suitable for:
  • Young and middle-aged working adults who have yet to reach the FRS and are looking to reduce income tax expense
  • CPF members who would like to help their parents build their retirement funds
  • Self-employed who prefer to take advantage of the higher and stable interest rate

    Qualifies for tax deduction
    Funds in SA earn 4% interest rate annually
    Able to enjoy significantly high tax relief of up to $14,000

use of SA funds
     Cash top-ups to SA does not count towards the computation of BRS
     Cash top-ups to SA cannot be utilized for CPF Investment Scheme

4. RSTU - Topping up Special Account with CPF (Ordinary Account)

Instead of using cash, this RSTU method allows CPF members to top up their Special Account / Retirement Account via CPF transfer from their Ordinary Account.  

Apparently, such CPF transfer allows one to earn higher interest rate of 4% in SA instead of 2.5% in OA. The main drawback, however is the passing up on using OA funds for housing payment or children's education. 

The maximum amount of OA monies that you can transfer is capped at the current FRS in your SA. However, there are certain restrictions imposed for the maximum amount of CPF savings that you can transfer to loved ones. I have included the relevant computational scenarios in the links below:
Unlike topping up SA with cash, it should be noted that this RSTU method via CPF transfer does not qualify for tax deduction. 

Suitable for:
  • Middle-aged working adults who have bought their houses and do not foresee any immediate use for OA funds 
  • CPF members who would like to help their spouse/parents build their retirement funds

    Increase in interest rate from 2.5% in OA to 4% in SA

Does not qualify for tax deduction
    Miss out on the use of OA funds for housing and education

Overview of the 4 CPF Top-up Methods

(Click to enlarge)

To summarize, only 2 out of the 4 
CPF top-up methods qualify for tax deduction, namely the voluntary contribution to MA and topping up SA with cash. 

For those whose main objective is to pay less tax, you should also pay attention to the cap of $80,000 imposed on the total amount of all income tax reliefs that you can claim for each Year of Assessment

In addition to reducing tax expense, these 2 CPF top-up methods also allow you to earn 4% interest rate on your retirement funds reliably. Amplified by the power of compoundingevery 1% of interest matters when time is on our side.

Personally, have voluntarily contributed to my Medisave for the benefit of reducing my tax bills this year. Having a decent sum in my Medisave can provide a peace of mind as medical calamities can happen at any age. Furthermore, doing so allows me to reach for the low-hanging fruit of BHS and bring forward the day when mandatory Medisave contribution start to overflow to my SA and build on my retirement funds. 

However, as we all know, nothing good is ever completely one-sided. Despite the multiple advantages as outlined above, one should be mindful of the illiquidity aspect of CPF funds as a main trade-off of the top-up. 

All 4 methods of contribution are irreversible processes and the top-up cash will be locked in your CPF accounts for the purpose of retirement. CPF savings may only be withdrawn from age 55 upon setting aside the Full Retirement Sum in the Retirement Account (or $5,000 if the said criterion is not fulfilled). 

With that in mind, it is imperative to plan your cash top-up properly and take charge of your personal finance by managing your cash flow wisely. 

Lastly, it is recommended that all applications and payments should reach CPF Board before the last 7 working days of December to enjoy tax relief for the following year’s Tax Assessment. 

Procrastinate no more!

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Disclaimer: Kindly note that this is not a sponsored post. The author is in no way affiliated with CPF Board and does not receive any form of remuneration for this post. The Boy who Procrastinates has compiled the information for his own reference, with the hope that it will benefit others as well.

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  1. How about returning cash to OA for those who used it for property purchase? No tax relief. Is it subjected to annual limits?

    1. For CPF Housing Scheme, you can choose to refund any amount, capped at the full principal amount you have withdrawn for the property with the accrued interest. I do not think that it is subjected to annual limits.