In his painfully slow journey towards financial freedom, Heartland Boy has made plenty of mistakes. The only saving grace is that he is still young and so has time to unwind some of his mistakes. One of the mistakes that he made was not realizing the wonders of making a voluntary contribution to the Central Provident Fund (‘CPF’) Medisave Account. It is something that he should have prioritised over the Retirement Sum Topping Up scheme(‘RSTU’). Both are examples of CPF schemes that allow a member to contribute to their CPF Accounts. However, making voluntary cash top up to the CPF Medisave Account (‘MA’) is materially different from the RSTU. Here is a detailed explanation of the CPF Medisave Account and the pros and cons of making a voluntary contribution to MA.
What Is CPF Medisave Account
According to the definition from CPF Board, Medisave is a national scheme which helps CPF members save for future medical expenses, especially after retirement. As the name suggests, MA can be used to pay for medical care and hospitalization expenses under certain circumstances. The maximum amount of funds that can be kept in the Medisave account is capped by the Basic Healthcare Sum (‘BHS’). The Basic Healthcare sum, which essentially places a ceiling for Medisave Account, is set at $52,000 in 2017. From 2018 onwards, the BHS will be increased to $54,500 for members aged below 65 years old. There are 2 ways to contribute to a member’s MA; either via mandatory contribution or voluntary contribution. It is the voluntary contribution aspect of it that this article shall focus on.
Advantages Of Making A Voluntary Contribution To Medisave Account
1. Enjoy Tax Relief With Cash Top-Up to MA
One of the main advantages of making a voluntary cash contribution to Medisave Account would be obtaining tax relief to reduce one’s chargeable income during tax assessment. Likewise, if you are making a cash top up to your parents’ Medisave on their behalf, your parents will therefore be entitled for tax relief using the same formula as stated below by replacing with their accounts’ balances (eg: Annual CPF Contribution Limit = parents’ and not yours). The formula to determine the amount of tax relief as extracted from IRAS’s website is:
Amount of tax relief from a voluntary cash contribution to MA will be the lowest of the following:
- Voluntary cash contribution to your MA; or
- Annual CPF Contribution Limit (i.e. $37,700 in 2017, calculated from Feb 17 to Jan 18) less mandatory CPF contribution; or
- Current BHS (i.e. $52,000 in 2017) less the balance in your MA before you make the voluntary cash contribution
You can work out the 3 scenarios and the amount eligible for personal income tax relief will be the lowest of the 3 scenarios. A word of caution on this as there is a maximum limit of $80,000 in total tax relief that an individual can claim annually.
2. MA Is More Flexible Than SA
The Medisave is more flexible than the Special Account (‘SA’) from the perspective of the scope of uses. Medisave can be used to offset medical treatments ranging from acute care to rehabilitative care. Not too long ago, Heartland Boy just used his Medisave to pay for his dental bill when he underwent a wisdom tooth extraction. MA can also be utilized to pay the premiums of health insurance policies such as Medishield Life, Eldershield and Integrated Shield Plan. Furthermore, the use of MA is also not limited to the CPF member himself. That is, Medisave can also be used to offset the medical bills for immediate family members. This is where it becomes especially useful for Heartland Boy. He is always worried over the fact that his parents have insufficient medical insurance coverage. Therefore, his mistake was not to have accelerated his BHS as early as possible.
Note that the Medisave cannot be used to offset purchase of medical equipment such as wheelchair, stethoscope etc. Most importantly, MA can be utilized at any age while the monies in the SA can only be withdrawn from age 55 onwards. Such flexibility and variety of uses make it more convincing for a CPF Member to prioritise topping up of MA over SA.
3. A High Interest Rate of 4% to 6% for MA
The Medisave Account is one of the high-yielding accounts within the CPF. Savings in the MA earn 4% interest per annum, with an additional 1% on the first $60,000 of the combined CPF balances. For members who are aged 55 and above, they get to enjoy an extra additional 1% interest per annum on the first $30,000 of their combined CPF balances. Therefore, for this group of members, it is not difficult for their MA to be yielding 6% per annum! That is the target that Heartland Boy is working towards for his parents. Unsurprisingly, he also performed a voluntary cash topup of his daughter’s angbao money into her MA.
The permutation gets more interesting under various scenarios. For CPF members who have achieved BHS for their MA but not Full Retirement Sum (‘FRS’) ($166,000 as at 1 January 2017) for their SA, interest generated from the existing funds in the MA will automatically overflow into the CPF SA. Meanwhile, mandatory contributions originally meant for the MA would then be re-directed into the SA instead as shown below. This means that the CPF SA now grows at double quick time to reach the FRS.
For CPF members whose MA and SA have both reached the BHS and FRS respectively, all interest from the MA and mandatory contributions originally meant for the MA would be allocated into the Ordinary Account (‘OA’) instead. Once funds are directed into the OA, they can be utilized for wider uses such as housing, education and investment. For CPF members who belong to this category, Heartland Boy thinks that you have done very well.
Therefore, the way that interest and contributions flow within the CPF meant that topping up your MA with cash is one of the best ways to supercharge your CPF monies in order to have a bountiful withdrawal at age 55.
Disadvantages Of Making A Voluntary Contribution To Medisave Account
1.Cash Is King
The main disadvantage of making a voluntary cash contribution would be giving up liquidity. It is always comforting to hold cash since you never know when you need it for a rainy day. However, if you have excess cash lying elsewhere, it may not hurt a bit to park them into the MA and earn a minimum of 4% interest per annum. In addition, this cash top up could help reduce your tax bill.
2. Limited By BHS and CPF Annual Contribution Limit
It is impossible to make a voluntary cash contribution once the MA reaches BHS. As aforementioned, the cash amount that can be voluntarily contributed to the MA is also restricted by the CPF Annual Contribution Limit. To mitigate this, it is really wise to do the cash top up to MA when a CPF member is still young. In this way, the likelihood of breaching the BHS and the CPF Annual Contribution Limit are relatively low.
For this same reason, it therefore provides another reason why a young CPF member should prioritize topping up the MA over SA. Given how the (i) CPF allocation rates and (ii) the various limits – BHS ($52,000) for MA and FRS ($166,000) for SA work in tandem, the window on using cash top up to MA to gain tax relief closes in faster than the RSTU route.
This is why Heartland Boy prefers to do a cash top up to his MA over his SA while he still has this opportunity.
How To Make A Voluntary Contribution To Medisave Account
Here is a step by step guide on how to make a voluntary contribution to your CPF Medisave Account.
A) On the Sidebar showing CPF Online Services, select “My Requests”. From the drop down option, select “Building Up My/My Recipient’s CPF Savings”.
B) Under the “Using Cash” section, look out for “Contribute to My Medisave Account via Internet Banking using e-cashier or cheque”. Select either option depending on your preference. Heartland selects “e-cashier”
C) Continue with “Contribute to my Medisave (Tax Deductible)” under Payment For. Click “Next” and “Check” the box after reading and accepting the terms and conditions.
D) Key in the amount you wish to contribute. A good tip here would be to click “Check Allowable Contribution*” to find out the amount that you are eligible to contribute. *Do note that this amount is valid only if you do not receive any contributions before the end of the year. If you receive other contributions, the VC amount may exceed the CPF Annual limit and the excess will be refunded without interest. Do note that Mandatory Contributions (MC) made by employers take precedence over VC when determining any excess made above the CPF Annual Limit.
E) Confirm your payment request and proceed to make payment accordingly.
Given that 2017 is fast coming to an end, there remains a small window of opportunity to take decisive action to reduce your income taxes. Making a voluntary cash contribution to your CPF Medisave Account should come handy, especially in an environment whereby the Singapore government has just hinted at raising taxes.
Tax relief for voluntary contribution to medisave account only applies when there is self employed income.
There is no additional tax relief above mandatory contribution.
I think this information from IRAS is quite clear cut. You can claim tax relief as long as you fulfill all 3 conditions:
Tax Relief for Voluntary Contributions
You may claim tax relief for your voluntary Medisave contributions if:
1)You are a Singapore Citizen or Permanent Resident;
2)You have made voluntary contributions to your Medisave account in the previous year; and
3)You derived any source of income (e.g. from rental, director’s fees, etc.) in the year you made the voluntary contributions.
so that means the first year that i made a voluntary MEDISAVE Contribution it does not count?
It counts. Did you read elsewhere that suggests otherwise?
Can I confirm that cash top to MA is in addition to cash top to SA via RTUS for claiming tax relief? Means I can claim more?
Yes, different schemes, but note the respective caps.
I have already hit BHS in 2019.
Once the new BHS is announced in Jan 2020, if I top up my MA to the new BHS before my mandatory CPF contribution from work in Jan 2020 comes in, do I get any tax relief?
As it is likely my mandatory CPF contribution to MA in 2020 will eventually hit the new BHS anyway.
Thank you for sharing your knowledge so freely on your blog btw.
Yes, you will be eligible for tax relief based on the lowest amount of the 3 conditions stated in this article!
I think probably Jinghao will not get any tax relief for that.
*Do note that this amount is valid only if you do not receive any contributions before the end of the year. If you receive other contributions, the VC amount may exceed the CPF Annual limit and the excess will be refunded without interest. Do note that Mandatory Contributions (MC) made by employers take precedence over VC when determining any excess made above the CPF Annual Limit.
So if Jinghao does VC in Jan 2020, however, the employers MC will come in every month of 2020 before end of 2020, and that takes precedence over VC.
Maybe you can try it in Jan 2020 and let’s see what will happen afterwards? or you can write an email to IRAS and share with us the official reply from IRAS?
He would but as i have put a disclaimer, it is the lowest amount on the 3 conditions stated. u r referring to condition 2 and we do not know if his mandatory contribution exceeds the annual contribution limit. So if MC > annual limit, the amount is 0 in test case 2.
Thanks for this entry! It really helps.
Might you know if the 37k+ limit also includes RTSU? I’m thinking if it’s possible to contribute 7k via RTSU and still contribute the maximum i can via VC to MA.
I believe it excludes the RSTU
if my BHS has reached the limit, does it makes sense to continue topping it up instead of SA, since it will automatically flow into SA. Based on the previous example where it makes more sense to top up MA instead of SA.
If you have reached your BHS, you cannot top up MA anymore. The concept is that your MA bucket is full.
Is it possible to contribute to my parents’ Medisave accounts?
Yes, it is possible provided that your parents MA have not reached the Basic HealthCare Sum yet
Curious reader says
Hi, can i check if i have reached the FRS and BHS, the
mandatory contribution + interest from MA +interest from SA will all go into OA? Is there a max bucket for the SA as well?
Hi Curious Reader,
If you have achieved BHS for your MA and FRS for your SA, mandatory contributions meant for your MA and its interests will flow towards your OA. Hope this clarifies.
Hi Heartland boy,
I understand that when someone does the voluntary housing refund, the amount goes back to OA. Do you know if there is a limit for that in one year? Is this part of the CPF Annual Limit?
Based on CPF’s website, the cap is “You can refund any amount, capped at the full principal amount you have withdrawn for the property with the accrued interest.” I believe that it is therefore not part of the CPF Annual Limit. For absolute certainty, do check with a CPF officer!
Tan Sow Chin says
Do I enjoy tax relief if I top up my husband’s MA? He has no employment income, only 50% of rental income.
Hi Sow Chin,
This article reflects the latest tax relief rules pertaining to cash top up of MA.