Pros And Cons Of Making RSTU Top-Ups To Your CPF Account At The Start Of The Year
The Retirement Sum Topping-Up (RSTU) Scheme can help us grow our CPF Special Account (SA) or Retirement Account (RA), beyond what we contribute from our salary.
Via the RSTU, those below 55 can contribute to their Special Account (up to the Full Retirement Sum (FRS)), while those above 55 can contribute to their Retirement Account (up to the Enhanced Retirement Sum (ERS)).
Topping up will help us boost our retirement nest egg, and potentially reach our Full Retirement Sum (FRS) more quickly. Not only that, we will also benefit from a dollar-for-dollar tax deduction of up to $16,000 when making RSTU cash-top ups. From 2022, this is for up to $8,000 for top-ups to our own Special or Retirement Account, and up to another $8,000 for RSTU top-ups to our loved ones’ Special or Retirement Accounts.
Do note that from 2022, tax relief on RSTU cash top-ups will be shared with MediSave Account top-ups.
More Singaporeans Making Use Of The Retirement Sum Topping-Up (RSTU) Scheme
Despite the challenging economy since COVID-19 hit, the CPF Board reported that RSTU top-ups were on the up, increasing in 2020, and crossing the $4 billion-mark for the first time by November 2021. This is already higher than the $3 billion RSTU top-ups made in 2020.
Not only are CPF members making more RSTU top-ups, but more are also making the top-ups – more than 220,000 members compared to the 140,000 who made RSTU top-ups in 2020. While it is clear that more people are taking the decision to make cash top-ups via the RSTU Scheme, there’s one other decision that’s in our hands – whether we make the top-ups at the start of the year or at the end of the year.
In this article, we look at a few pros and cons of making top-ups at the start of the year compared to at the end of the year.
Pro #1: Earn Higher Interest Rates When You Top-Up Earlier In The Year
When we make RSTU top-ups into our CPF at the start of the year, we will earn more in interest returns.
For example, if we make a $8,000 cash top-up to our Special or Retirement Account in January each year for 10 years, we will have $80,000 worth of top-up monies and $27,300 worth of interest returns.
However, if we topped up the same amount but made the Special or Retirement Account top-ups in December each year rather than January, we will have the $80,000 worth of top-up monies but only $22,700 worth of interest returns. This is more than 20% less in interest returns.
This happens because interest rates are calculated on a monthly basis, while only credited and compounded on a yearly basis. Note also that any CPF credits (including contributions) will only start earning interest returns in the following month. However, CPF withdrawals/ deductions stop earning interest returns in the month itself.
Pro #2: Allocate Your Spare Funds In Advance
While the first advantage is related to earning interest returns on our funds earlier rather than later in the year, the second advantage is that we are over with this payment at the start of the year.
This has the intangible benefit of reducing your mental load. Similar to how some top leaders reduce mental fatigue by wearing the same outfit every day (think Steve Job’s iconic turtleneck and jeans), topping up at the start of the year can take a load off our minds. We don’t have to worry about allocating cash each month or right at the end of the year to our Special or Retirement Account. Depending on the way we manage our money, we may not want to have the stress of a “recurring expense” even if we can stop it at any time.
Similarly, we may not want to have idle cash sitting around, possibly tempting us to draw on it before making the RSTU top-up at the end of the year.
Con #1: Less Cash Flow During The Year
CPF top-ups are irreversible. When we make an RSTU top-up at the start of the year, we immediately lose that cash flow in case of an emergency.
For example, the past couple of years may have been really bad for many people. But perhaps we may not know just how bad at the start of the year in January. If we made our RSTU top-ups of up to $16,000 in January and later find ourselves retrenched, facing a pay-cut or put on no-pay leave, we may be left in a tight financial situation. And the $16,000 could have come in handy.
By contributing on a monthly basis, we break down the figure into more bite-sized amounts or only allocate excess cash into our CPF respectively. By doing it only at the end of the year, we would already have saved that spare cash.
Con #2: May Not Receive Full Benefits Of Tax Deduction
Each year, individuals have a personal income tax relief cap of $80,000. Once we reach this cap, any further actions we take to reduce our income tax will not apply.
If we had made our RSTU contributions at the start of the year, we would not know exactly what our income tax relief for the year would be. Obviously, we can guess this number, but we cannot know for sure.
If we do breach the $80,000 personal income tax relief cap, we would have benefitted from waiting to contribute only in the later part of the year.
Con #3: Inability To Change Our Minds When We Spot Better Opportunities
We’ve established that CPF top-ups are irreversible in the first point. In this con, rather than facing a cash flow crunch, contributing early in the year can also mean we lose out on opportunities. This is especially relevant if a unique opportunity comes up during the year that would beat the interest returns and tax benefits of making RSTU contributions.
For example, if we made RSTU contributions to our own and our loved ones’ CPF accounts in January 2020, we would not have been able to take advantage of the stock market crash in March 2020. Similarly, in 2022, the markets are tinking downwards – perhaps offering an opportunity to invest at more attractive levels.
RSTU Helps Us Grow Our Retirement Adequacy
Making RSTU top-ups builds up our retirement funds, and eventually gives us a bigger monthly payout via CPF LIFE. By taking money away from ourselves during our younger years, and locking it up in the CFP system, we are giving our older-self greater peace of mind during retirement.
This should be the main consideration when deciding to make RSTU top-ups. Once we have decided to make RSTU top-ups, then we can review the pros and cons of when we should transfer our money into the CPF system.
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