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Why worry about hitting the CPF MS (FRS) too soon?

Saturday, August 20, 2016



Hi AK,

I've been following your blog for years and thanks for all the tips you've shared. 

I transferred a considerable sum of monies from OA to SA when I was 34 as I was inspired by your strategy of doing so. I've been trying to build up my RS and hope that my SA balance will reach my RS within the next few years.


I'm also considering to top up my SA with cash to take advantage of the tax relief. However, I realised the strategy of transferring more OA to SA again may interfere with my plans to get tax relief in subsequent years, as the faster my SA grows, the faster I'll reach RS and after I reach RS, I will not be able to top up my SA and earn tax relief. 

Is my understanding correct? If yes, would it be better if I slow down on the OA transfers so that I can take advantage of the tax relief in subsequent years, esp since I'd expect income to get higher (and hence more in need of tax relief)?







Hi YY,

If you would like to have tax benefit, yes, MS Top Up to SA is the way to go. Up to $7K a year of cash top up will enjoy tax benefit.

Once you have hit the MS (the FRS) in your CPF-SA, you will not be allowed to do anymore MS Top Up to SA.

Thus, slowing down or stopping OA to SA transfer might be a good idea if tax benefit from MS Top Up to SA is something that is important to you.

Best wishes,
AK


Related post:
Met CPF Minimum Sum but has one regret.

13 comments:

Disclaimer said...

I guess this depends on how much you earn then. If we earn little, the taxable income is also low. But if we earn a lot then the tax rate will go up to more than what SA account can get you.

Capricon said...

Hi
But if you could trfr OA to SA now, you get the compounding effect earlier.
If no more top up to SA, then next would be SRS but that requires your own investment decision to grow it.

Regards

Kevin said...

Hi AK,

You mentioned that you will be making CPF annual voluntary cash contribution but how do you do it since you have hit the MS (the FRS) in your CPF-SA which is $200K as at the end of 2015?

SMK said...

at 20%, tax relief is free money. free money NOW.

as long as cash flow is good.

AK71 said...

Hi Disclaimer,

I always say that it depends on our motivation. I believe that beefing up our CPF accounts is a good way to ensuring some certainty in retirement funding. So, if that is our primary motivation, then, the arguments about having bonds in our portfolio or getting income tax relief become less important.

AK71 said...

Hi Kevin,

Voluntary Contributions are allowed as long as our Mandatory Contributions (from earned income) do not hit the annual limit. This is even if our CPF-SA has hit the prevailing MS (FRS).

AK71 said...

Hi Capricon,

That was why I did OA to SA transfers for the first few years of my working life. Despite not being a highly paid employee, time and a bigger base in the early years grew my SA rapidly. :)

AK71 said...

Hi SMK,

You were very prolific yesterday. Thanks for all the comments. :)

Venkatesan said...

I was in the same shoes - you just need to try calculating the total return - assumptions vary between pl. Assuming you are in the top tax bracket, you will save 20% - one time. Lets say you can transfer 70000 to SA and compare it between doing it now and splitting oer 10 years :
1) Over 10 years: 7000*(1.04)^10+1400 + 7000*(1.04)^9+1400 + ... + 7000*(1.04)^1+1400 = 101404.5
(investing the 1400 got at 0%, if reinvesting at higher rate results vary)
2) one shot 70000 = 7000*1.04^10 = 103617
So, despite tax saving lumpsum trf to SA is better in this case
But one more thing: you also lose the opportunity to invest more in SA as your pot fills up ie, lets say you hae 100k in SA now. If you do a trf now, you could trf upto 61k. If you do it next year, you could do only 57k and the window keeps shrinking every year (despite increasing MS, the window will decrease as 4% > rate of MS increase)
So, I took the call that doing a lumpsum transfer will save me more money - you might want to do your own calculations along the lines - its just an objective decision (except for your expected rate of return which might not be realized - i conservatively used 0% for me, but YMMV

Mao Mao said...

We cannot rule out the benefits of Tax Relief in the future since the taxes are increasing.

Kiki said...

Hi

I saw people leaving comments that they will prefer cpf life without bequest option. Can I know what that means ? Does it mean bigger payout for their own instead of leaving for beneficiaries ? Sorry but cpf life is really confusing. I would also prefer bigger payout to my self as is my hard earned. Why govt would have such a option. Thanks

AK71 said...

Hi Kiki,

Logically, a "no bequest" option should result in larger monthly payouts. Why isn't an option like this available? Your guess is as good as mine. -.-"

AK71 said...



Hi

I was introduced to this concept and chanced upon your article below:

Stop accrued interest from growing.

I would like to check if I can use cash to refund my OA partially back to my CPF-OA, and then transfer this to CPF-SA, if SA limit has not been hit?

I am unable to do voluntary cash contribution as I have hit the annual limit, and have already done the $7k topup to SA (with tax relief)

Would the above method help me grow my SA faster (in addition to $7k topup), using cash repay OA (used in mortage) ->back to OA -> SA?

If it can be done, then I should be able to immediately hit SA limit using this method. Does that mean SA would be self-funded and with accrued interest, it would be able to grow to meet the "new SA limit" from now on?

Hope you can comment.

Thank you.
J

-------------------------------------------
Hi J,

Yes, you can refund to your CPF-OA using cash.

No, once your CPF-SA has hit the prevailing FRS, you cannot do any OA to SA transfers. It doesn't matter how the money found its way into the OA.

Yes, once your CPF-SA hits the FRS, the interest income will help meet the annual increase requirement for FRS. No more worries about this. ;)

Gambatte!

Best wishes,
AK

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