[By Dr Jake Goh]
My son was born last November. We had been planning and waiting for his arrival. But what we didn’t expect was for my wife to undergo an emergency caesarean delivery. Thankfully, I was able to use my Medisave. Then, when I received my year-end bonus, I topped up my Medisave, intending only to maximise my CPF account. But what happened next was a pleasant surprise.
Why I Chose to Top Up
These days, you really can’t get a virtually risk-free investment at 4% to 5% anywhere else but CPF. If you see such a claim (outside of CPF, that claims to be “risk-free”), more than likely, that company is listed under the MAS Investor Alert List. And you are indeed taking major risks you may not be aware of.
To get the most benefit from the high Medisave interest rate, I maintain my Medisave account at the full amount for the Basic Healthcare Sum ($54500 as of 2018).
Money in CPF is also protected from creditors. If you’re ever in serious financial trouble – you lose a lawsuit, or file for bankruptcy – creditors might come after your assets. Money in CPF is shielded from creditors in these cases.
What I Didn’t Know
It’s tax season now, and while I was only intending to maximise my CPF account, I was pleasantly surprised to also obtain a tax relief for the top-up. This was totally unintended. I thought, “Yay! More money saved! More people should know about this.”
So here’s a good summary I found from CFP’s microsite Are You Ready?. It provides a good visual summary of the different types of top-ups (and which ones give you tax relief):
Please note that once you top-up/make a voluntary contribution, you’re committed to that transaction. Your cash is no longer liquid. And if the top-up is in Medisave, it can only be used for certain purposes. If the top-up is in another CPF account (SA, RA), then you cannot access it until later in life. You can only withdraw a portion of that money if you exceed the Basic Retirement Sum at age 55.
If you need your money to be liquid and accessible now or in the near future, then a CPF top-up may not be a good idea. Top-ups and voluntary contributions are irreversible, so please take the necessary time to carefully research and consider them.
For me, my year-end bonus was a “surplus”, so I felt that topping-up was the best use of that money.
[Dr Jake Goh is a Frugal in Singapore contributor who enjoys making choices that benefit his mind, body and wallet.]