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Voluntary Contribution to CPF MA in 2021 (Part 2.)

Wednesday, December 30, 2020

Darry is the reason for this blog which is really my reply to his recent catalytic comment.


There are many gems in the comments section of ASSI and if you have not read Darry's comment, it is in my last blog entry and I have hyperlinked it at the end of this blog.


Actually, you might want to read his comment first as it would help you better make sense of this blog entry.





Hi Darry,


I am thinking of doing this (i.e. not doing VC to MA but simply doing VC to all 3 CPF accounts) when I turn 50 as the CPF Allocation Rates for members age 50 to 55 will place a bigger proportion of our contribution into the SA.


Just based on eye power, the increase in contribution to the SA looks like it will be a big jump of more than 40% once I turn 50 and this will last till I am 55.


I blogged about this big jump more than 3 years ago.


Read blog here:
CPF SA savings 10 years from now.

Reference provided at the end of this blog.





With the BHS increasing by $3K while the CPF Annual Contribution Limit remains unchanged in 2021, doing a $3K VC to MA in order to reach the new BHS would mean less of my VC to all 3 accounts going to my SA later on.


Easy to miss this detail if we are not diligent enough.


So, you are right that it makes sense for people of my age who, like me, do not pay income tax to forgo VC to MA and just do VC to 3 accounts in the new year.


This is for maximum benefit.


$10 is still money and I don't ever look down on money. ;)


Thank you for crunching the numbers and sharing with us here. :)





So, with this blog, AK is bringing forward his plan to stop VC to his CPF MA by one year.


Yes, AK is flipping prata and won't be doing VC to MA in 2021.


AK will only be doing VC to all 3 CPF accounts (OA, SA and MA) in 2021.


Hey, $10 is still good money.


Probably good for a few roti prata and with eggs too. ;p


I am not letting Darry's effort and kindness go to waste. 


This is also why I decided to publish my reply to Darry as a blog as not many readers go to the comments section.


Readers who are in the same boat as AK will probably find this sharing interesting.


Readers who are not in the same boat now might want to take note too as there is plenty of room in the boat.


Gambatte! 






Read Darry's comment here:
Voluntary Contribution to CPF MA in 2021. (Published on 28 Dec 20.)

Reference:
CPF Contribution and Allocation Rates.

34 comments:

foolish chameleon said...

i believe this is for a non tax paying person who will max out his 37.7k AL. how about someone who doesnt have that much VC for the year . ie 10k or 15k.

will it be adviseable to just hit the BHS limit for 2021? then VC3A the rest.

SnOOpy168 said...

Darry did a good job at the numbers. i had been doing VC to 3 account for 2020 and will continue to do so. Just to squeeze some $ into SA and the 1.5% extra interest for next 15 years. the penalty of not having tax relief on $7k VC to MA, ok lah.

Thanks for reminder that 50 years and more have different allocation %. lagi better. now, i am waiting to hear from my peers, kpkb about having to top up cash for their housing loan repayment.

and to welcome AK71 to world of the 50s

Nclcpf said...

What is the diff between darry's option 1 and 2 for tax deduction, thought is the same at $3k for you?

AK71 said...

Hi fc,

For that someone in your example, I feel that doing VC to MA early in January is probably still a good idea because of the income tax relief it attracts.

The income tax relief on even a $1000 VC to his MA is most likely going to be more than just $10. ;)

AK71 said...

Hi SnOOpy168,

Very happy to receive that little nudge from Darry. :D

There are still many who do not believe in the CPF but more are waking up to the fact that the CPF is a good thing. :)

Yes, just a few more years to 55 years old.

Growing old is not all doom and gloom if we are well prepared.

Reference:
Withdrawing CPF savings. How much and how?

AK71 said...

Hi Nclcpf,

Oh, there is absolutely no difference for me on the tax relief front as I don't pay any income tax.

However, for someone who pays income tax, VC to MA makes sense because it enjoys income tax relief.

VC to all 3 accounts (VC3A) is not eligible for income tax relief.

AK71 said...

You might be interested in this blog which explains the difference:
Know how to grow our CPF savings.

Siew Mun said...

Hi AK, my wife's is 50 in 2021 and next 5 years until 2025 I will focus to top up my wife's CPF. In Jan 2021, I plan to top my wife's CPF in the following order
1 MA to $63,000.
2. SA to prevailing 2021 FRS.
3. vc all 3 accts for my wife.

I am already 55, gainfully employed and my CPF is 1m55 in a steady state. At 55, I used my increased take home pay to VC my wife's CPF, due to a decreased in CPF mandatory contribution and use my bonuses to top up. Her monthly mandatory CPF contribution is $600+.
Last 3 months, 2020 I used $60k topped up my wife's SA to FRS and MA to BHS.

AK71 said...

Hi Siew Mun,

Very sensible to max out your wife's CPF account.

I know it is your gift to her because you are a good husband but to be very pragmatic, husbands should max out their wives' CPF accounts if they can afford to do so.

The earlier they do it, the more time compounding has to work on a larger base.

With two full CPF accounts, retirement will be doubly secure compared to just having one. :)

Thinking along a similar line:
How younger members can get 6% per year from CPF?

SnOOpy168 said...

Well, we volunteered all our energies to show them tye goodness im CPF as a tool. It's upto them. I am kicking myself now for not following you this time last year in exiting First REIT, looks like i may have to work a few more years to make up for this mistake.

AK71 said...

Hi SnOOpy168,

For sure, we can only lead horses to water but we cannot make them drink. ;)

See:
A river called "CPF" and the stubborn horses.

It wasn't this time last year I got out of First REIT.

I got out of First REIT a bit more than two years ago.

See:
Sold First REIT to raise funds.

If you got into First REIT the same time I did which was 10 years or more ago and have been holding on since then, you probably didn't lose money with all the dividends paid out over the years.

I suspect this is the case since you have been reading my blogs since the early years.

So, don't kick yourself too much or too hard over this. :)

LKH said...

Do you think is time to go in First Reit at current price?

darry said...

Hi AK71 and Friends,

Thanks AK for sharing this blog, hope you enjoy the $10 worth of free prata on a yearly basis. Just to add on, Self-Employed Persons (SEP) who topup $37740 to 3AC will also be sharing the same benefits (if they had max up their MA/SA) as all their contribution towards CPF will be considered for Tax Relief, regardless of MA or 3AC. But if SEP's MA is not max up (eg 25K), then full CPFAL contribution to MA will generate more interests. Please choose the option that will maximise your overall CPF gains.

To SnOOpy168 , if you are paying income tax, then contribute 3K to MA BHS will likely provide more saving for you, depending on your tax bracket. Work out the numbers and you will know which option to go for. To get further tax relief on MA, pay all Medishield Plans using Medisave and immediately top it back via VCMA to qualify for more tax relief. (Do note this is limit by CPFAL of 37740)

darry said...

Another number game for AK. Let’s find out if he is able to get more free prata this time.

In part 2, I would like to highlight the transition age year (eg 49 to 50) factor. We know that CPF contribution done in Jan will reap the maximum interest over 11 months. Take for example 49 years old contribution on Jan 2021, the monthly interest for $37740 (based on 49 year old allocation to 3AC) will be around $93. Hence total interest gain for this contribution will be $1032. (based on my spreadsheet calculation of per month rate compounded interests)

Assume AK's birthday is on Jan 2021, and he decided to put all the 37740 to 3AC in Feb so as to get the maximum SA rate of 11.5 points. (Do note that if your 50th birth month is on Jan, and if you put the money in Jan, you will get the same CPF allocation as 49yo. You will need to contribute in Feb 2021, after the Jan birth month, in order to get upgrade to the 50 year old allocation). As such, the new interest per month for $37740 will be $97/mth will be effective starting in March 2021. And total interest will be $982 (This is computed over 10 months as we cannot count Jan and Feb is the contribution month). $1032 - $982 = $50 interest is missing. (once again, based on my spreadsheet compounded rate)

Assume AK's birthday is on June 2021, and he decided to put all the 37740 to 3AC in July for maximum SA rate of 11.5 points. Then the new interest per month for $37740 will still be $97/mth. And total interest will be $488 (This is computed over 5 months as we cannot count Jan to July). $1032 - $488 = $544 interest is missing.

If AK is born in Nov and if he still wish to wait after birth month to do VC in Dec so as to achieve 11.5 points for SA, then he will be missing out the whole year of interest which is $1032.
If AK can only reach 50 on Dec 2021, then he should do VC in Jan 2021 as the new SA allocation will only be effective the next month which is 2022 Jan (in which will become 2022 contribution).

However, from a delay gratification angle, we can analyse that 50yo-SA is $11730 vs 49yo-SA $8160, and the interest difference is $53 in subsequent year (based on $11730 - $8160 = 3570 x 0.015%). Hence for those who are born/contributed in later months of the year will require more years to balance out the missing interests gain as compared to Jan contribution.

If born in Jan and topup in Feb to get new rate interest starting March, then the sum will balance out in 1 year, which is 2022 Feb. And thereafter, you will gain additional $5/mth.
If born in Feb and topup in March to get new rate interest starting April, then the number will balance out in 2 year, which is 2023 Feb. And thereafter, you will gain additional $5/mth.
If born in March and topup in April to get new rate interest starting May, then the number will balance out in 3 year, which is 2024 Feb. And thereafter, you will gain additional $5/mth.
So it is about 1 year for each month delay to break even and thereafter you will gain $5/mth in your CPF, this works out $60/year.
And based on worst case scenario of Nov birth month, you will need to hold for another 10 year, before it can break even and provide additional $5/mth for the rest of the rolling months.
If you decided to withdraw all your SA/OA by 55, then choose the option that provide the best gains as we dont know your birth month.

The number provided is to determine which option provide the best results for the individual. I hereby apologise if the numbers is not accurate enough, but using the concept of the delay gratifications, it will allow you to contribute up to 6 years of the higher 11.5 points SA unless you are born in the month of Dec.

There is no right or wrong approach. it is your choice based on your birth month and the period you plan to keep the money in CPF.

AK71 said...

Hi LKH,

Middle of last year, when a reader asked me this question, I said:

"Of course, all investments are good at the right price and for First REIT, I believe that the right price is a lot lower." Source: Comments section in Sold First REIT.

In that blog entry, I said:

"... if we feel that the REIT's income stream is in peril or if we are not ready for rights issues, we should not invest in the REIT."

So, should we invest in First REIT now?

First REIT is now priced to reflect a much weaker but more realistic income stream.

I feel that it is less perilous now.

However, this rights issue is probably only the first of many more to come and you might want to read the blog I hyperlinked earlier to see why I say this.

It is important to ask if we have the stomach for this.

AK71 said...

Hi Darry,

Wow! You are on a roll!

Appreciate all the heavy lifting you are doing.

Mind boggling but in a good way.

I will just continue to do VCs in January each year.

Ho ho ho!

Merry Christmas! :D

SnOOpy168 said...

AK

Still not happy when i didn't know how to read the writings on your blog. Reinvested the dividends numerous times too. For now, I am thinking of not throwing good money after the bad one, or what else can convince me to stick to this rights ? Perhaps that mentality can only apply to our CPF balances - where the returns is written in B & W.

Anyway, for the 1st time in my working life, i had 2 CPF notices telling me that i am nearing VC limits $37,740. And it did crossed that mark recently. So, for the 1st time in my life and I hoped many more to come, I just applied for "Refund of CPF/MediSave contributions by Self-Employed Person FORM CPF SE 20". Perhaps the $ will come in before CNY.

Wondering if your Facebook page, roll call for those who did VC to MS, will be active for 2021 ? AND AK's 4-D for CNY :-)

Nclcpf said...

Hi ak, would it be more prudent to VC $37k in jan21 for working adult also and let CPFB backpay him? Since interest is low now, we can take advantage of Cpf saving rates.

AK71 said...

Hi SnOOpy168,

I know what you mean but it is probably impossible to find a risk free and volatility free investment that also generates a reasonable income for us.

As an investor for income, I don't usually reinvest any dividend unless I feel that I am getting a good deal and this is even more so now as I need the income as a retiree.

First REIT needs this rights issue to shore up its balance sheet but it will need more rights issues to buy assets from its sponsor in future.

For most of us, taking full advantage of the CPF is the best way to ensure a measure of financial security in our old age and this is something you are surely doing well in. :)

Facebook? What is that? Can eat or not? LOL.

Not ever going back to Facebook as I rather like being Facebook free. ;)

No more 4D for CNY.

Gambling is bad, you know? ;p

Interesting reads for readers who don't know:
1. Financially free and Facebook free.
2. Don't have to smart to be rich.

AK71 said...

Hi Nclcpf,

I have not done that before.

Before you do it, you might want to give CPFB a call to see if it will work the way you think it should. ;)

foolish chameleon said...

hi Darry,

"Thanks AK for sharing this blog, hope you enjoy the $10 worth of free prata on a yearly basis. Just to add on, Self-Employed Persons (SEP) who topup $37740 to 3AC will also be sharing the same benefits (if they had max up their MA/SA) as all their contribution towards CPF will be considered for Tax Relief, regardless of MA or 3AC. But if SEP's MA is not max up (eg 25K), then full CPFAL contribution to MA will generate more interests. Please choose the option that will maximise your overall CPF gains."

i am SEP with BHS and FRS already.
so i should also VC3A to hit my CPFAL first? then do 3k to MA?
or the other way round?
i also want to get free prata yearly.

the second post with all that numbers are too mind blowing. cannot follow . haha.
just currious, what is your day job? are you an actuary?

darry said...

Hi Siew Mun,

Congratulation on attaining 1M55.

https://www.google.com/amp/s/toc.net/2020/09/07/cpf-sa-shielding-and-oa-shielding-a-live-example/amp/

Did you apply the 5455 concept to shield your SA upon reaching 55? Hope you done it well. For those interested, please read above link to get more details. In simple terms

1) SA Shield only - Just before your 55 birthday, shield anything above 40K SA to the fund, and let SA 40K + OA overflow to RA. Move back the shield SA when RA is formed.
2) SA and OA Shield - And if you have more cash sitting idle on hand, then shield anything above 40K SA and 20K OA to the fund, and only 60K will form the RA. Then cash topup RA to FRS/ERS as desired. Move back the shield SA/OA when RA is formed.

By performing above shield method, your OA/SA become an high interest saving account / emergency fund.
Imagine few years later and you need some money (eg renovation 150K), then shield anything above 40K SA to the fund, and draw down 40K SA + whatever amount you need in OA. This will maximise your interest rate returns.


Happy to know that you had achieved ERS in your RA. Now let review a different scenario for your wife when she turn 55.

1a) If most of her SA will likely be RSTU TOPUP, you cannot shield those TOPUP value. If the RSTU TOPUP exceed that of the BRS in 2026, then opt for BRS with housing pledge, so that most of the TOPUP RSTU remain in SA
1b) For those who can shield SA 40K, OA 20K, and move 60K to RA, then topup cash to the BRS before returning the fund to OA/SA.
2) Why BRS? why not go for ERS like yours? This is such that she can continuing to RSTU 7K to get tax relief for herself. And your children can also TOPUP 7K each to get the TAX relief too.
3) The FRS which is supposed to move to RA, will remain in SA, so technically, it is still earning the same 4% interest in SA, especially if the contribution are RSTU TOPUP, which is unshieldable.
4) Then before 65 PEA, max up her RA to the prevailing ERS for CPF LIFE (either using CASH or OA transfer from your account).
5) By 66 and beyond, continue topup prevailing ERS difference into RA and this will form the AMP, which will grow each year when you top it up.

Of course if you have the extra idle cash doing nothing and no longer need to claim TAX relief, then going for ERS via CASH TOPUP immediately at 55 will maximise the benefits of her CPF. For number sake, $186000 CASH TOPUP will yield $7440/year compounded interest. This will likely offset any TAX relief saving. If not, then go at a comfortable pace to do the cash topup for tax relief yearly as the original FRS is still earning good interest in OA/SA.


PROs for opting BRS in this scenario
1) Protect the initial RSTU TOPUP above BRS, thus allow you to inject more cash into CPF RA for more interest
2) RSTU TOPUP in RA below FRS is eligible for tax relief
3) Higher SA/OA value for emergency withdrawal

CONs
1) Her self esteem will be lower as she is only BRS, while you are ERS.
2) She couldn’t resist the new luxury handbag below which cost $578K, and withdraw from OA/SA to fund it without telling you. (Just joking).

https://kabinetprive.com/shop/product/hermes-constance-24-shiny-noir-porosus-with-white-gold-diamond-hardware?ref=feed&alg_currency=SGD&gclid=CjwKCAiAirb_BRBNEiwALHlnD1Eqoqn43sCA6FVGyK20SMcISZH3EviX45BKnXX2WCmq6LrkuulQARoCnoAQAvD_BwE

darry said...

Hi foolish chameleon,

As you are SEPs with BHS/FRS, then option 2 - VC3AC will be preferred.

1) 3K VCMA, and then $34740 to 3AC (this gives OA - $27229 , SA - $7511 , MA - $3000) . SA + MA = $10511 can earn 4% interest.

2) $37740 to 3AC, and this gives OA - $26580 , SA $8160 and MA - $3000). In this option, SA + MA = $11160 can earn 4% interest

Hence option 2 will have additional $649 in SA, which can earn additional $10 interest ($649 x 0.015% as this is the difference between SA and OA interest rate). Please note the compound effect in the later years, which means for every additional year, you will still get the additional $10 from the original $649 which remain in SA.

What is my day job? hmmm … reading AK's blogs and learning from him. Cheers!

AK71 said...

Hi Darry,

Thanks for crunching the numbers for Siew Mun and FC. :)

Maximising returns from our CPF savings is a very interesting topic and there are many CPF exploiters, er, I mean experts out that. ;p

Gambatte! :D

Incidentally, I am looking for a new bag but that bag isn't my style. -.-"

Really, it isn't the price tag that bothers me, it is the style. O_o

Reference:
(Maximising CPF SA savings and returns?

Blur Sotong said...

This is such an interesting read over a lazy rainy evening. May I ask whether any recent 55yrs old CPF experts try out the shielding hack? The question is whether CPFB would allow these shielding to even take place. Thanks all for your generous self talking.

AK71 said...

Hi Blur Sotong,

I like to think of this as a feature of the CPF and not a loophole but it feels like a loophole since the government keeps saying that the CPF is to help the masses achieve a basic level of retirement adequacy.

The shielding of the OA and SA just before turning 55 and then topping up the RA to the FRS at 55 is something only someone with quite a bit of spare cash (i.e. relatively well to do) can do.

As for a real life example, in the reference before your comment, I provided a link to an article in The Straits Times which related the experience of a reporter who did SA shielding.

It worked.

I will have to wait and see if the rules change in the next 5 years before I turn 55. ;)

SnOOpy168 said...

Darry. This year, i did $2.8k to MS directly to cover the delta and a deduction in Dec2019.

the balance, i will VC to 3AC. Perhaps this year, i will do the same. will the $4k relief helps to lower my tax bill ? too tired to think for now

SnOOpy168 said...

AK71. sometimes i wonder what i did wrong in life to deserve this kind of shell shock. anyway, thanks to reading in depth about Ak's ASSI, i had pushed CPF from an almost forgotten tool 5 6 years ago, to almost meeting ERS. almost. Lets see whats the final interest received and my excess VC refunded.

we should nudge CPF to have the BHS & AL cap removed ?

Happy New Year 2021 everyone

AK71 said...

Hi SnOOpy168,

Hey, don't be too hard on yourself.

All of us have had our cans of worms in life.

As long as we are right more often than wrong, we will succeed eventually. :)

The CPF is not meant to benefit the rich or so the claim goes.

So, I doubt that annual contribution limit will ever be removed but it could be raised, of course. ;)

Happy New Year. :D

Reference:
CPF is to make the rich richer.

darry said...

Hi AK and Friends,

I would like to add another nudge to earn this Jan's interest for your 2021 VC contribution.

CPF interest rate is calculated based on the lowest day of the month. In the past, we used ENETS which will typically take a few days to update the statements. However, we can now utilise PAYNOW to contribute and it will be reflected instantly on your CPF account, which makes today 1st Jan the lowest day of the month. Hence, you shall be credited with the Jan's interest.

Hurry up ! Fast hands and fast legs to earn Jan interest. And a Happy New Year to everyone.

AK71 said...

Hi Darry,

Thank you for reminding us of this lobang.

I fast hands and fast legs $37,740 VC3A liao.

Kamsiah you plenty plenty.

I will get many more free egg pratas.

Sedap!

Have a safe and happy 2021. :D

darry said...

Hi AK71 and Friends,

My sincere apologies as I had probably mistaken the information about interest is calculated based on the lowest day of the month. Hence, I had verified on CPF website and pasted the below from QnA. While the lowest day of the month is still valid, the other point being contribution this month will only start earning the interest next month. There goes the free pratas for Jan 2021. And now I am wondering if the interests for 2020, being credited in 1st Jan 2021, will it also be getting interests starting next month as it is considered "new" contribution for this month. Anyway, eating less prata is good for health too. Take it as a blessing in disguise.


Q How is my CPF interest computed and credited into my accounts?
A
CPF interest is computed monthly. It is then credited to your respective accounts and compounded annually. CPF interest earned in the year will be credited to your CPF accounts by 1 January of the following year.

CPF balances used for interest computation are affected by the transactions in your account.

For instance, contributions (including refunds) received this month start earning interest next month. Withdrawals/deductions in this month will not earn interest from this month onwards.

AK71 said...

Hi Darry,

Now that you mention, I remember Siew Mun or another reader telling me before that it makes sense to make the voluntary contribution to 3 accounts towards the end of January.

Hey, your intention was good and no serious harm done as I only lost 0.03% interest per annum as the money was just waiting in my POSB savings account.

How much interest income did I lose on $37,740?

Er, 94 cents? LOL. ;p

Thanks for the clarification and do keep sharing your discoveries about the CPF with us. :)

Nclcpf said...

Hi Darry, under 1a) I am afraid we cant pledge property and leave the balance in SA, the process should be transfer FRS from SA to RA upon 55 yo, then we can apply property pledge for BRS on RA. This is my understanding from cpf website.

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