Although retirement may seem far off, it is never too early to start saving. The Central Provident Fund (CPF) is an integral part of Singaporeans’ retirement planning. Small actions, such as CPF transfers and cash top-ups, can help develop a nest egg and safeguard a desired future lifestyle regardless of where you are in life: just starting out, about to buy a home, raising a family, or nearing retirement.
Here are 5 CPF tricks to help you game the system. Some will be especially helpful for people who are 55 or older. You can take advantage of the higher interest rates offered by Special Accounts (SAs) and Retirement Accounts (RAs) by following the tips provided here.
Trick #1: Protecting your Special Account
At the age of 55, your accumulated SA and OA funds will be transferred to the RA. As of 2023, the maximum amount that can be transferred automatically is the Full Retirement Sum (FRS), which is set at $198,800.
Avoid having to take money from your IRA by doing the following a few weeks before you turn 55. Keep in mind that you can’t put all of your SA savings into your account. The minimum amount required is $40,000. The rest can be invested in the CPF Investment Scheme as a short-term, generally safe investment product.
When you turn 55, your RA will automatically be credited with $40,000 from your SA and OA funds, up to the FRS. Once you’re ready, you can sell your short-term investment and deposit the proceeds (together with any profits) into your retirement account.
By using this strategy, you will be able to keep most of your SA funds and are now receiving enticing interest on them.
Keep in mind the potential dangers of this method before deciding where to temporarily stash your SA funds. You may have to stomach losses or think about liquidating the fund if its value lowers during the investment period.
Trick #2 Topping up to Enhanced Retirement Sum (ERS)
If you are 55 or older and would like to increase the amount of money you get from CPF LIFE, you can do so by increasing your RA each year to the prevailing ERS.
If you turn 55 by this year and have an ERS amount of $298,200 in your RA, your monthly CPF LIFE payout under the CPF LIFE Standard Plan will be between $2,190 and $2,360. Higher future monthly payouts can be achieved by continuing to contribute to the prevailing ERS in succeeding years.
Don’t include interest when figuring up how much you can add to your RA each year. If you have $290,200 (excluding interest) in your RA in 2022, you can add another $8,000 in 2023 to reach the then-current ERS of $298,200.
Trick#3: Making use of the CPF voluntary contribution scheme
If you are under 55 years old, you have contributed up to the current FRS in your SA, and if you are 55 or older, you have contributed up to the ERS in your RA.
The CPF voluntary contribution (VC) plan, often known as the “VC-3A” system, allows you to contribute up to the CPF Annual Limit to your three CPF accounts (Ordinary, Special, and Medisave Accounts) per year.
This yearly cap accounts for both required and optional payments. By deducting your mandatory contribution from the CPF Annual Limit ($37,740), you can calculate the maximum amount of voluntary contribution you can make to your three CPF accounts this year.
Your voluntary contribution payment in excess of the CPF Annual Limit will be reimbursed to you without interest. To determine the percentage of your CPF contribution that goes where, you can use the allocation calculator available on the CPF Board’s website.
Trick #4: Contributing to your parents' and spouse's CPF accounts
You can save up to $8,000 in taxes this way, and your spouse and/or parents can also benefit from the lucrative CPF interest. Remember that tax breaks apply only to cash deposits and withdrawals. Additional increases above the annual FRS limit of $80,000 are not eligible for tax relief.
After saving the Basic Retirement Sum in your own CPF account, you have the option of transferring up to a defined maximum amount to the CPF accounts of your spouse and/or parents. There are catchphrases.
They’ll have more money in retirement thanks to the interest they earn on their savings, and they won’t have to worry about running out of money when they retire.
Trick #5: Start topping off CPF by January
If you plan on topping off annually anyhow, why not do it in January? This is due to the fact that early contributions to a CPF account yield a higher rate of interest. So, hurry up and get it done.
Assume you put $5,000 into your SA every year for a decade, for a total of $50,000. If you had added to it in January, you would have earned an additional $40,800 after 20 years at 4% interest. When compared to the December top-off interest of $40,000, this is a significant increase.
Summary
These are 5 ways to maximize your CPF contributions.
Keep in mind that the agent banks will charge you S$2.50 each transaction and S$2 per counter per quarter.
After putting away $20,000 in your OA and $40,000 in your SA, you have the option of investing the funds in either account, though we would advise leaving your SA balance uninvested so that it can earn the attractive interest of at least 4% and grow over time.