We are almost a month away from 31st December, and for some of us, it is the time of the year once again to see how we can minimise our taxes.
The government has provided a few ways for us to enjoy some tax reliefs. Last year, I shared an article on Supplementary Retirement Scheme (SRS), and how contributing to it is one way that can help us to reduce our taxable income, while at the same time building up a retirement nest egg for ourselves. You can refer to this link to read more.
In this article, I will be sharing another tax relief option that many have become more aware of over the years – the CPF Cash Top-up Relief.
How do you qualify?
This relief is given to encourage Singaporeans and Permanent Residents to set aside money for retirement needs either in their own CPF accounts or those of family members. To qualify, you must hold a Singapore NRIC and:
1. You and/or your employer have made cash top-ups under the CPF Retirement Sum Topping-Up Scheme to your:
a. Special Account (for recipients below age 55); or
b. Retirement Account (for recipients age 55 and above).
2. You have made a cash top-up under the CPF Retirement Sum Topping-Up Scheme to the Special/Retirement Accounts of your:
a. Parents or Parents-in-law;
b. Grandparents or Grandparents-in-law;
c. Spouse; and/or
d. Siblings
What kind of top-ups are eligible for tax relief?
Only cash top-ups will qualify for tax relief. Transferring funds between Ordinary Account and Special Account will not be considered.
For spouse and sibling top ups, you qualify for the relief only if their annual income did not exceed $4,000 in the year preceding the year of top-up. This income threshold does not apply to parents, grandparents, handicapped* spouse or handicapped siblings.
What is the maximum tax relief I can claim?
For topping up of own Special Account or Retirement Account, the maximum tax relief is $7,000, subjected to the terms below.
For topping up of family members’ Special account or Retirement Account, the maximum tax relief is $7,000, subjected to the terms below.
Hence, the total maximum allowable CPF Cash Top-up Relief is $14,000.
What’s the maximum amount I can top up for my or my family members’ Special/Retirement Accounts?
1. If you or your family members are BELOW 55,
You can do a cash top-up of your Special Account up to the prevailing Full Retirement Scheme (FRS) amount, which is currently $161,000, and will be increasing every year.
If you have already hit the FRS, you will be unable to top up any further.
2. If you or your family members are ABOVE 55,
You can do up a cash top-up of your Retirement Account, also up to the prevailing Full Retirement Scheme (FRS) amount, which is currently $161,000.
If you have already hit the FRS, you can still choose to top up, up to the Enhanced Retirement Scheme (ERS) amount, currently $241,500. However, there will be no CPF cash top-up relief beyond the FRS amount.
In summary, as long as the recipient’s Special or Retirement Account has already hit the prevailing FRS amount, there will be NO CPF CASH TOP-UP TAX RELIEF payable.
Should I top up my CPF and enjoy the tax relief?
If you are eligible for this tax relief, it is a possible option that you can consider, as it not only helps you to reduce your tax but it also earns the current 4% pa interest in the Special Account and Retirement Account.
For someone whose chargeable income falls within the tax bracket of 17% (annual chargeable income of $160,000 – $200,000), enjoying a $14,000 relief would save them about $2,380 in taxes the following year, and at the same time earn another $560 in interest (assuming 4% pa) for the year.
Having said that, one would also need to seek advice regarding his existing financial position, to calculate the opportunity cost of setting aside this sum of money. Topping up one’s CPF is a permanent action and cannot be reversed. If this money has been ear marked for other investments or future financial goals, it is important to consider them carefully before making this decision.
(Source: Inland Revenue Authority of Singapore – www.iras.gov.sg)