The end of the decade is nearly here! Before you head off for your final holidays or countdown parties, consider the following actions to lower your taxes. Do note that the tax relief methods recommended below are constrained by the maximum personal tax relief of $80,000.
- Topping up your parents CPF Retirement Account (RA) or Special Account (SA)
You can give your parents a CPF Christmas present by topping up their CPF account. If your parents are over 55 years old, and their CPF RA hasn’t exceeded the current Full Retirement Sum (FRS), you will be able to top up their account and enjoy tax savings.
If they are younger than 55 years old, their CPF SA must be at the Current FRS less the sum of SA savings and net SA savings withdrawn for investments for you to get tax relief benefits.
The maximum tax relief is capped at $7,000.
Instead of giving them cash, topping up their CPF SA/RA is a more thoughtful gesture, because they’ll not only get to enjoy a higher interest rate compared to what they would get in a savings account, but it’ll also help to increase their lifelong monthly payout through CPF Life. You can even borrow money from them and return it to them by topping up SA/RA. Talk about maximising tax relief at no trade-offs!
2.Topping up your own CPF Medical Account (CPF MA) or CPF SA
We recommend that you prioritise topping up your CPF MA over your CPF SA since you can use your CPF MA for various medical purposes and use them to pay the premiums of your hospitalisation policies, such as Medishield Life/ Integrated Shield Plans. You can also use it to pay for approved day surgeries such as wisdom tooth extractions, or approved chronic conditions such as asthma and psoriasis. The maximum tax relief that you can enjoy is up to $7,000 for topping up your own MA or SA, or $14,000 for topping up you and your loved ones’ account
3.Topping up your Supplementary Retirement Scheme (SRS) account to lower taxable income
If you have been investing consistently and are comfortable with the volatility of the stock market, we strongly recommend topping up your SRS account as well. You can also take greater risk with investing through SRS. Additionally, in the scenario where you really need the cash from SRS, you also have the option to withdraw it with a 5% penalty, and the amount withdrawn will be taxable.
Which account to prioritise? A returns and flexibility perspective.
Which account to top up is highly subjective and is ultimately a very personal decision. Your age also affects the decision as well – if you are older, topping up SRS or even your CPF SA makes more sense because you have a shorter lock-in period.
For ourselves, we prefer to top up the SRS account first because of the potential higher returns from SRS. A consistent, dollar cost average (DCA) approach for SRS investment (at no additional transactional cost through Endowus) will give you a better chance of hitting a 6% to 7% returns from investing in a 100% equity portfolio, so go ahead, check out the historical returns of the funds that we carry, and play around with the portfolio allocation.
However, be aware that there is value to having cash on hand versus having it locked up in CPF or SRS. As a rule of thumb, we would not recommend you to try to save on taxes if your obligations are below the 7% tax bracket, but again, if you are older, this consideration may change because the lock up period is shorter. Do note that since SRS is a tax deferral account, the more money you have in it, you may have to pay more taxes when you withdraw.
That is all from your friendly digital wealth advisor, Merry Christmas and
Happy New Year!