In his painfully slow journey towards financial freedom, Heartland Boy has made plenty of mistakes. The only saving grace is that he is still young and so has time to unwind some of his mistakes. One of the mistakes that he made was not realizing the wonders of making a voluntary contribution to the Central Provident Fund ('CPF') Medisave Account. It is something that he should have prioritised over the Retirement Sum Topping Up scheme('RSTU'). Both are examples of CPF schemes that allow a member to contribute to their CPF Accounts. However, making voluntary cash top up to the CPF Medisave Account ('MA') is materially different from the RSTU. Here is a detailed explanation of the CPF Medisave Account and the pros and cons of making a voluntary contribution to MA.
WHAT IS CPF MEDISAVE ACCOUNT
According to the definition from CPF Board, Medisave is a national scheme which helps CPF members save for future medical expenses, especially after retirement. As the name suggests, MA can be used to pay for medical care and hospitalization expenses under certain circumstances. The maximum amount of funds that can be kept in the Medisave account is capped by the Basic Healthcare Sum ('BHS'). The Basic Healthcare sum, which essentially places a ceiling for Medisave Account, is set at $52,000 in 2017. From 2018 onwards, the BHS will be increased to $54,500. The BHS is adjusted yearly for members below the age of 65 to keep pace with the growth in Medisave use by the elderly. At the age of 65, the BHS is fixed and will not change for the rest of a member's life. There are 2 ways to contribute to a member's MA; either via mandatory contribution or voluntary contribution. It is the voluntary contribution aspect of it that this article shall focus on.
ADVANTAGES OF MAKING A VOLUNTARY CONTRIBUTION TO MEDISAVE ACCOUNT
1. ENJOY TAX RELIEF WITH CASH TOP-UP TO MA
One of the main advantages of making a voluntary cash contribution to Medisave Account would be obtaining tax relief to reduce one's chargeable income during tax assessment. Likewise, if you are making a cash top up to your parents' Medisave on their behalf, your parents will therefore be entitled for tax relief using the same formula as stated below by replacing with their accounts' balances (eg: Annual CPF Contribution Limit = parents' and not yours). The formula to determine the amount of tax relief as extracted from IRAS's website is:
Amount of tax relief from a voluntary cash contribution to MA will be the lowest of the following:
Voluntary cash contribution to your MA; or
Annual CPF Contribution Limit (i.e. $37,700 in 2017) less mandatory CPF contribution; or
Current BHS (i.e. $52,000 in 2017) less the balance in your MA before you make the voluntary cash contribution
You can work out the 3 scenarios and the amount eligible for personal income tax relief will be the lowest of the 3 scenarios. A word of caution on this as there is a maximum limit of $80,000 in total tax relief that an individual can claim annually.
2. MA IS MORE FLEXIBLE THAN SA
The Medisave is more flexible than the Special Account ('SA') from the perspective of the scope of uses. Medisave can be used to offset medical treatments ranging from acute care to rehabilitative care. Not too long ago, Heartland Boy just used his Medisave to pay for his dental bill when he underwent a wisdom tooth extraction. MA can also be utilized to pay the premiums of health insurance policies such as Medishield Life, Eldershield and Integrated Shield Plan. Furthermore, the use of MA is also not limited to the CPF member himself. That is, Medisave can also be used to offset the medical bills for immediate family members. This is where it becomes especially useful for Heartland Boy. He is always worried over the fact that his parents have insufficient medical insurance coverage. Therefore, his mistake was not to have accelerated his BHS as early as possible.
Note that the Medisave cannot be used to offset purchase of medical equipment such as wheelchair, stethoscope etc. Most importantly, MA can be utilized at any age while the monies in the SA can only be withdrawn from age 55 onwards. Such flexibility and variety of uses make it more convincing for a CPF Member to prioritise topping up of MA over SA.
3. A HIGH INTEREST RATE OF 4% TO 6% FOR MA
The Medisave Account is one of the high-yielding accounts within the CPF. Savings in the MA earn base interest of 4% interest per annum. That is the target that Heartland Boy is working towards for his parents.
The permutation gets more interesting under various scenarios. For CPF members who have achieved BHS for their MA but not Full Retirement Sum ('FRS') ($166,000 as at 1 January 2017) for their SA, interest generated from the existing funds in the MA will automatically overflow into the CPF SA. Meanwhile, mandatory contributions originally meant for the MA would then be re-directed into the SA instead as shown below. This means that the CPF SA now grows at double quick time to reach the FRS.
For CPF members whose MA and SA have both reached the BHS and FRS respectively, all interest from the MA and mandatory contributions originally meant for the MA would be allocated into the Ordinary Account ('OA') instead. Once funds are directed into the OA, they can be utilized for wider uses such as housing, education and investment. For CPF members who belong to this category, Heartland Boy thinks that you have done very well.
Therefore, the way that interest and contributions flow within the CPF meant that topping up your MA with cash is one of the best ways to supercharge your CPF monies in order to have a bountiful withdrawal at age 55.
DISADVANTAGES OF MAKING A VOLUNTARY CONTRIBUTION TO MEDISAVE ACCOUNT
1. CASH IS KING
The main disadvantage of making a voluntary cash contribution would be giving up liquidity. It is always comforting to hold cash since you never know when you need it for a rainy day. However, if you have excess cash lying elsewhere, it may not hurt a bit to park them into the MA and earn a minimum of 4% interest per annum. In addition, this cash top up could help reduce your tax bill.
2. LIMITED BY BHS AND CPF ANNUAL CONTRIBUTION LIMIT
It is impossible to make a voluntary cash contribution once the MA reaches BHS. As aforementioned, the cash amount that can be voluntarily contributed to the MA is also restricted by the CPF Annual Contribution Limit. To mitigate this, it is really wise to do the cash top up to MA when a CPF member is still young. In this way, the likelihood of breaching the BHS and the CPF Annual Contribution Limit are relatively low.
HOW TO MAKE A VOLUNTARY CONTRIBUTION TO MEDISAVE ACCOUNT
Here is a step by step guide on how to make a voluntary contribution to your CPF Medisave Account.
A) On the Sidebar showing my cpf Online Services, select "My Requests". From the drop down option, select "Building Up My/My Recipient's CPF Savings".
B) Under the "Using Cash" section, look out for "Contribute to My Medisave Account via Internet Banking using e-cashier or cheque". Select either option depending on your preference. Heartland selects "e-cashier"
C) Continue with "Contribute to my Medisave (Tax Deductible)" under Payment For. Click "Next" and "Check" the box after reading and accepting the terms and conditions.
D) Key in the amount you wish to contribute. A good tip here would be to click "Check Allowable Contribution*" to find out the amount that you are eligible to contribute. *Do note that this amount is valid only if you do not receive any contributions before the end of the year. If you receive other contributions, the VC amount may exceed the CPF Annual limit and the excess will be refunded without interest. Do note that Mandatory Contributions (MC) made by employers take precedence over VC when determining any excess made above the CPF Annual Limit.
E) Confirm your payment request and proceed to make payment accordingly.
Given that 2017 is fast coming to an end, there remains a small window of opportunity to take decisive action to reduce your income taxes. Making a voluntary cash contribution to your CPF Medisave Account should come handy, especially in an environment whereby the Singapore government has just hinted at raising taxes.
This article was first published on Heartland Boy.