From past observations of the personal finance community, I notice that CPF members pay most attention to their CPF accounts at both the start and end of the year. This is because these are usually optimal periods for:
- maximising tax reliefs
- maximising CPF interest rates
- updating CPF balances as annual interest have just been credited
However, the perennial problem of “Should I do a cash top up to my CPF MediSave Accounts (‘MA) or Special Account (‘SA’) first?” has been bothering a group of CPF members at the start of every year. These are members who have achieved the Basic Healthcare Sum (‘BHS’) in their MA but not the Full Retirement Sum (‘FRS’) in their SA. Since I am fortunate to count myself amongst this group, I have vested interest to understand the difference between a cash top up to the CPF SA and CPF MA.
Assessing Tax Relief For Cash Top-ups to CPF
We first need to understand the revised tax relief rules pertaining cash top ups to CPF. To simplify CPF further, CPF members will enjoy up to $8,000 tax relief for cash top-ups to own CPF account from Yr 2022 onwards. This $8,000 cap is applicable for top-ups to own SA, MA and Retirement Account (‘RA’). Another $8,000 tax relief is applicable for cash top ups to loved ones’ (parents, grandparents, spouse etc) CPF accounts. More details of the revised tax reliefs affecting CPF cash top-ups can be found in this article. Therefore, in terms of tax relief, there is no difference whether a CPF member chooses to perform a cash top up to his MA or SA.
Having established that there is no difference in terms of tax relief, let us now understand how our cash top up will be treated in each of CPF MA and SA.
Cash Top Up to MediSave Account
The BHS has increased to $66,000 in Yr 2022 compared to $63,000 in Yr 2021. For a CPF member who has already achieved the BHS in Yr 2021, there is now a $3,000 gap before he/she reaches the prevailing BHS again. If the CPF member chooses to perform a $3,000 cash top up to his/her MA, the CPF member must be mindful of the following:
- Funds in MA can only be withdrawn for authorised uses such as medical treatment, payment of health insurance policies
- With the $3,000 cash top-up, BHS is once again achieved and subsequent mandatory contributions meant for the MA would now overflow to the SA instead (as CPF member has not achieved FRS yet). Refer to Diagram 1 to understand this “tap and bucket” concept.
To add a further layer of complexity to the classic dilemma, it is also time sensitive if one chooses to perform a cash top up to MA first. That is because the amount of time you have to do this is until your next mandatory contribution. For my case, my employer usually credits my mandatory CPF contributions around the 15th day of the calendar month. Therefore, I have a comfortable 15-day window but being the overzealous me, I did a cash top-up to my MA on 1 January as shown in Diagram 2. (don’t judge me pls)
If you don’t do this fast enough, funds meant for the MA from subsequent mandatory contributions will continue to flow into the MA until it reaches BHS and Diagram 1 repeats again. Along the same vein, such opportunities to do a cash top up to your MA would be during deductions of the premiums for MediShield and CareShield Life.
Cash Top Up to Special Account
On the other hand, a cash top up to SA only is made under the Retirement Sum Topping Up Scheme (‘RSTU’). Since CPF member has not reached FRS yet, the maximum that he/she can top up is till the prevailing FRS. Note that even if the cash top-up made under RSTU is more than $8,000, the tax relief is still capped at $8,000 as aforementioned. In choosing to do a cash top up to one’s SA, please note that this sum is designated to “grow your retirement savings and used to increase your monthly payouts in retirement” (Source: CPF)
To understand the implication of this sentence, we first need to understand CPF withdrawal rules. According to CPF rules, the amount that you can withdraw from your CPF at age 55 is the aggregate of:
Rule 1) $5,000 OR your OA + SA savings above the Full Retirement Sum, whichever is higher
Rule 2) Any Retirement Account Savings (exclude top-up monies, government grants and interest earned) above the Basic Retirement Sum that comes with a sufficient property pledge
Based on the withdrawal rules, it is clear that funds deposited under the RSTU cannot be withdrawn when CPF member turns 55 years old since that constitutes top-up monies. It will also not count towards the Basic Retirement Sum (’BRS’) computation. For a more detailed step-by-step calculation, I highly recommend you to refer to Scenario 4 in this article on “How Much Money Can You Withdraw From Your CPF At 55” which I reproduce below in Diagram 3.
Whenever it comes to the point of “cannot withdraw your money from CPF”, it usually sets off plenty of alarm bells. Paranoia reign and some CPF members would even wonder, “But what if all the monies deposited under the RSTU EXCEED the FRS, can the excess then be withdrawn?”
If we think about this logically, we are only allowed to do a cash top-up to our SA up till the prevailing FRS. In other words, the principal top-up monies can never exceed the prevailing FRS. However, it is possible that the interest generated from the principal top-up monies exceed the prevailing FRS and that interest can be withdrawn.
The Top up MA or SA First Dilemma
Now that we have understood how cash topped up to MA and SA will be treated, here’s what I would do if I find myself under such circumstances.
Situation 1: Heartland Boy only has $3,000 cash to spare for a CPF top-up
- I would top up all $3,000 into MA to reach BHS
- Once BHS is reached, MA bucket becomes full and subsequent mandatory contributions meant for MA and the interest from MA will flow to SA (have not reached FRS yet) instead. This source of fund that flows into the SA is not part of RSTU and hence the restrictions pertaining to RSTU monies do not apply
Situation 2: Heartland Boy only has $8,000 cash to spare for a CPF top-up
- I would top up $3,000 into MA to reach BHS
- I would then top up the remaining $5,000 into SA
In this way, only $5,000 is considered as RSTU and I will get to enjoy the maximum $8,000 tax relief.
Finally, as a pro-tip, you can use the UOB Absolute Cashback Card to top up GrabPay first and then use GrabPay to PayNow your CPF top-up amount to earn 1.7% cashback as shown below. That’s $51 cashback for a $3,000 CPF topup, you can find out how to execute this hack in this article.
As cliched as it sounds, there is indeed no perfect answer to this conundrum. That is because when it comes to CPF, many factors are at play at once – what’s the opportunity cost of your spare cash, what’s the role of CPF in your retirement plan etc. While individual circumstances definitely differ, what I hope is that this article will help you make your decision on a more informed basis.