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Should I top up my CPF-SA, CPF-MA or SRS account?

Thursday, March 26, 2015

This blog post is inspired by a comment by a reader, Lee Jiahui, who thinks that the "SA is last priority to throw cash at", preferring to top up "self SRS or parents or children's medisave account".

To read the full comment, please go to my FB wall.

Since I always say that we should beef up our CPF-SA and do it early, what is my response to this comment?

Well, in a nutshell, what a person does would depend on his objectives.

The purpose of the CPF-SA is to fund our retirement and cannot be used for other purposes unlike the CPF-OA which although is meant to fund our retirement ultimately can be used for myriad purposes.

Keep going.
Discounting the additional 1% for the first $40K, the CPF-SA pays a 4% per annum base rate which, if given time and a boost very early on, will result in almost magical results. 

The 8th wonder of the world, remember? 

This was what I thought almost 20 years ago when I first entered the workforce as a working adult. I decided to experiment with it and regular readers know the results today.

I also like the idea of having an SRS account and contributing to it to reduce total income tax payable. 

Topping up of the CPF-MA is also a good idea since it pays 4% per annum too and get "free" H&S insurance in the process. (See related post #5 at the end of this blog.)

We can also top up the CPF-MAs of loved ones to help pay for their H&S plans.

These are all financially prudent things to do but what we do ultimately depends on our objectives.

If our objective is to speed up the creation of a retirement nest egg in a risk free manner, then, doing CPF-OA to SA funds transfer very early on in life is something we can consider.

This was what I did.

Doing MS top up to our CPF-SA will also help and this comes with the added advantage of income tax relief (for up to $7K of top up per year).

However, not everyone will have the spare cash to do this, especially early on in our careers. I know because I was in the same shoes before.

There are many things we can do to help ensure that our personal finances are healthy.

However, there are so many areas to cover in personal finance and what we do or don't do now (beyond the basics) will depend on our objectives which would probably be prioritised differently for different people, depending on our own beliefs and circumstances.

Whatever the case may be, in a world like ours, we need to have a sound long term financial plan. 

Some are lucky to have their parents plan early for them. For most of us, we have to take on this responsibility ourselves and the earlier the better.

Source: CPF Board.
Always bear in mind that there are opportunity costs.
Always bear in mind that our home is a consumption item.

Map out a path but be on the lookout constantly for a better way to travel towards our destination. 

It will be hard in the beginning. It might even be demoralising. I know. 

However, if we keep doing the right things, it will get easier with time and we will be rewarded. Believe it.

Related posts:

1. Ten questions from an undergrad.


Mao Mao said...

If funds are limited, I think topping up SA first has more benefits than topping up SRS.

AK71 said...

Hi MaoMao,

I believe that if our objective is retirement adequacy, then, the SA is the logical first choice. It is a low hanging fruit to me. :)

AK71 said...

From a FB chat:

Dexter Choo:
Anyway if let's say you do VC and Max your SA yearly , you still wanna Max SRS because you're using it as a warchest?

Assi AK:
If I can max, I will max.
But if I no longer have an earned income and no longer have to pay income tax, I will not contribute to SRS liao.

Unknown said...

If we contribute to SA monthly, we do not need to pay income tax right? For example, yearly income tax is $1200. Before that i contribute $100 every month for a year, so my income tax is $0?

AK71 said...

Hi VH,

It depends on what is your chargeable income. So, if, for example, your chargeable income is $30,000 a year, your income tax payable is $200. No income tax for the first $20,000 and 2% income tax for the next $10,000.

In order not to pay that $200, you could contribute to your CPF-SA, CPF-MA and/or SRS account a total of $10,000 in that year.

You might want to refer to this:
Income Tax Rates.

AK71 said...

"Always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer." Charlie Munger.

AK71 said...

Reader says:
I'm planning to do VC monthly to my CPF account. Which account should I start first MA or SA? Both can give me a tax relief.

AK says:
What we do will depend on our objectives.
Money in the SA is purely for retirement funding.
Money in the MA is used to pay for H&S insurance and medical bills.

See this:

AK71 said...

Ng Cheekoon:
You are banking on the rules that won't change in the next XXX years? How can I be sure?

So far, changes to the CPF system have been made to help ensure greater retirement adequacy. I trust that this will continue to be so.
Of course, if we don't trust the system, don't do voluntary contributions or top ups. :)

AK71 said...

Reader says...
I finally save up 7k for RSTU this month. But coming next month the BHS up 2.5k. Should I split the money for MA? Both top up look the same. Tax relief and 4% CPF interest. What's your thoughts please?

AK says...
Read this blog. ;p

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