Having received $14k of interests from my CPF savings for 2021, I am getting greedy.
I ponder whether to earn more interests by transferring funds from CPF Ordinary Account (OA) to Special Account (SA).
The Full Retirement Sum (FRS) is $192,000 for members who turn age 55 in year 2022.
My current Special Account balance is $178,795.29.
I have sufficient funds in my OA to transfer $13,204.71 to SA for attainment of FRS instantly.
However, I decided not to attain FRS this year for 2 reasons.
1. Personal loan from my own OA account for property purchase
As I have already made a down-payment for a HDB BTO flat, there is an outstanding amount of more than $300k to be settled with either a bank loan or HDB loan in 5 years time. Having no intention to cash out on my investments in stocks, Reits and savings bonds with average yield above 2.5% nor take on any form of loans, I plan to make full use of funds from CPF OA for the outstanding payment of HDB BTO flat.
Due to property purchase plans, I have stopped transferring monies from OA to SA in the past 3 years, incurring the opportunity costs of earning lesser interest rate of 2.5% in OA compared to 4% in SA.
It is important to bear in mind that such personal loan is costly as amount of monies withdrawn from OA is subjected to accrued interest of 2.5% and this will possible eat into the profits from property resale profits in the future as proceeds from property sales will need to be credited back to CPF OA together with accrued interests.
2. Enjoy tax relief from Retirement Sum Top-Up (RSTU) Scheme of SA account
My CPF SA account has been increasing at a rate of around $27k every year inclusive of the annual $7k cash top up for tax relief under the RSTU scheme in the past. It is important to note that once MA hits the limit of $66k, contributions to MA overflows to SA, to achieve a greater contribution amount to SA.
From RSTU of $8k into SA account this year, I am able to save at least $560 of taxes (assuming 7% tax bracket) and gain $320 of interests (4% in SA), achieving a total reward of $980 from $8k. This is higher than the $195 (additional 1.5% interest) that would be gained for transferring $13k from OA to SA to attain FRS instantly.
Based on the FRS projection from dollarsandsense, I will have at most 2 years to enjoy tax reliefs from RSTU before attaining FRS of $197,800 in 2023 (projected based on 3% increments). This is assuming my CPF MA hits the limit, myself staying employed with CPF SA contributions of another 2 x $20k and 2 x $8k RSTU in the next 2 years.
Since I expect my active income from employment will continue to grow and attract higher taxes, I hope to be able to enjoy some tax reliefs for at least this year. Also knowing that I will attain FRS by plan before age of 40 gives me the confidence to not do anything to tamper with my CPF accounts. After 2023, I will let the compounding effect do its natural wonders to ensure that I will attain FRS of more than $400k in 2048 or so.
Yes. $400k is the projected FRS after 2048! This is the harsh reality from mathematics. The critics grumble and complain that CPF monies are not our own monies because of this FRS thingy. It is very hard and impossible to withdraw our CPF monies at age of 55 or 65 because we could not attain the ever growing FRS, and due to being unable to earn the ever-growing salary that keep pace with the growth rate of FRS.
I am not going to dwell on that topic because I am convinced that we are in full control of our own financial health and destiny. We can always transfer monies from OA to SA, save up to make cash top ups or voluntary contributions to CPF accounts in order to achieve FRS early in our lives and let the compounding effect take control to help us attain the FRS even before we retire.
Thanks for reading. Stay safe and strong always.
With Love and Peace,
Qiongster
10 comments:
Think RSTU isnt counted by CPF to be part of the FRS, https://investmentmoats.com/ did a writeup on this as well. just something to note
Awesome SA. But don't u feel tat u r now locked into a mortgage that will take a long time to be repaid?
I dun think much abt accrued interest. It's just original interest I would get from cpf oa. But I use to buy flat. If I sell my flat, I still need to buy a new flat since it's a home. Not an investment asset. When I rebuy, it's not like the profit earned from home sales is going somewhere else. It's still me. It's the same as use cpf sa to go invest thinking can get better than 4% returns.
Hi Anonymous,
I have checked that the maximum amount I can top up using cash to CPF SA is the difference of FRS and my SA amount. Hence once SA amount is equal or greater than FRS of $192k, RSTU is not allowed.
With love & peace,
Qiongster
Hi Rokawa,
All mortgages take a long time to be repaid.
I do not like mortgages such as bank loans or hdb loans because peace of mind and freedom from liabilities are priceless.
Hence I intend to use own CPF OA money to fully pay for a home.
Our CPF monies are our own monies. We can do whatever we like to it.
Do note that accrued interests from withdrawn amounts in CPF OA need to be deducted from profits when selling a flat.
With love & peace,
Qiongster
I used to worried about accrued interest for a while but forgot it due to busyness with work. Now I am reached withdrawal age. And heck, who cares. When you are 55, you can withdraw excess above FRS including the accrued interest paid to yourself. So relax bro.
I don't like loans too. What I did is every 5 years, we go to HDB to pay off a lump, besides the monthly deductions. Did it twice to clear the loan. Your method is more prudent though.
Accrued interest is only at 2.5% whereas if we invest properly, we could easily beat 2.5%. Not much to fear about accrued interest. Nice to hear that. Cheers.
Hi qiong, I think you missed his point, hope you can clarify your thoughts after properly hearing his comment:
He is saying
1. You are in a position to both pay off your house (less 300k loan), and yet still have the upfront cash to still sit in your SA
2. Not many people can do that, himself included - his money is enough to pay for a flat that's all
3. Instead of putting in money into SA, and be unable to afford a flat at a reasonable loan liability, he would rather use the money first and owe it to himself - on the assumption that the home will appreciate equal to or more that an equivalent SA investment
To add to what he says,
1. SA transfer requires a person to commit first, before knowing if they have money in the future to buy a home (because you have to start early and accrued interest demands as early a start as possible)
I guess the question is
1. Do you think its prudent to do this commitment first(transfer into SA) or keep money into OA to save for property? (then transferring excess amounts to SA)
Also do consider that 4% is only for initial balance of a certain amount, after that, it's a reduced interest of 2.5%
Also consider the fact that the property generates income (rental), which will factor into a percentage of the 'appreciation' or final cash earned on the money - and this scales to the value of the property (ie a 1.5million property will generate more rental than a 800k property)
Hi d0m,
Actually it is subjective to tell whether it's prudent to transfer funds from OA to SA for FRS attainment or save up funds in OA to buy a home.
Under the most ideal world, one should transfer all funds from OA to SA once start working to attain FRS ASAP and also avoid using CPF OA for payment of property, meaning take on bank loan while invest own cash savings to generate higher returns than the bank loan interest.
However in reality world, such decision really depends on many permutations and factors such as one's property type, risk appetite, willingness to take on huge bank loans, or preference to use HDB loan, mortgage duration, income levels attracting varying tax brackets and so on.
As for CPF SA, the 4% interest is fixed but not guaranteed to stay at such rate forever. Only the 1% additional interest is for initial certain amount.
With love & peace,
Qiongster
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