Defer RSTU cash top-up till Income Level reaches higher tax bracket, yay or nay?

Taxes are essential for nation-building and developing Singapore into a stronger community, a better environment and a more vibrant economy. While it is crucial for the nation to collect more taxes; taxes at the same time is an expense out of the pocket for an individual — reducing the amount of taxes payable through legit means is a key and financially smart move.

We aim to avoid paying too much income taxes by maximise our tax reliefs. There is no change in total tax reliefs amount for Year of Assessment (YA) 2019 — personal income tax reliefs is still subject to an overall relief cap of $80,000.

The main aim is to hit as much tax reliefs as you can under the various categories, as found on the Ministry of Finance (MOF) website. By doing so, you bring down your tax bracket by one, two and sometimes even three tiers.

For example, an individual earning $130,000 annually is in the 15% tax bracket without any tax relief. If she can somehow maximise the tax reliefs of $80,000, her chargeable income becomes $50,000 — she is now in the 7% tax bracket. For $130,000, the gross tax payable is ($7,950 + [$10,000 x 15%]) = $9,450. For chargeable income of $50,000, the gross tax payable is ($550 + [$10,000 x 7%]) = $1,250. A tax savings of ($9,450 – $1,250) = $8,200.

Chargeable IncomeGross Tax payableChargeable IncomeIncome Tax rateGross Tax payable
First $20,000$00%$0
First $20,000$0Next $10,0002%$200
First $30,000$200Next $10,0003.5%$350
First $40,000$550Next $40,0007%$2,800
First $80,000$3,350Next $40,00011.5%$4,600
First $120,000$7,950Next $40,00015%$6,000
First $160,000$13,950Next $40,00018%$7,200
First $200,000$21,150Next $40,00019%$7,600
First $240,000$28,750Next $40,00019.5%$7,800
First $280,000$36,550Next $40,00020%$8,000
First $320,000$44,550Next $40,00022%

Hitting the maximum tax reliefs of $80,000 is the most ideal, though this is usually not the case. However, aiming for at least 25% – 50% of tax reliefs should not be that hard to do so.

I wanted to concentrate this discussion on tax reliefs arising from CPF & SRS cash top-ups / contributions.

It is a general rule of life. During your time in the workforce, your earning power gradually increases from the time you step into the world, sometimes taper off or even decreases as you take on less demanding role prior to your retirement. More income means you potentially move into a higher tax bracket and pay more taxes as you grow older.

For RSTU cash top-up to SA, besides the yearly limit of $7,000 for tax reliefs, there is also the hard cap of FRS amount for SA account.
For contribution to SRS, there is only the yearly limit of $15,300 for tax reliefs with no hard cap for SRS account.

There are 2 camps of thoughts:

  1. Don’t reach FRS amount in your SA so early in life. Use RSTU cash top-up to your SA for tax reliefs later in life when your income tax bracket is much higher.
  2. Reach FRS amount in your SA early in life and enjoy the fruits of compounded interests over a longer period of time.

I am in the second camp, and will pen down some of my thoughts on why you need not wait or defer to a higher tax bracket before starting your RSTU cash top-up to SA. We know the cons of RSTU cash top-up to SA, so I am not going to dwell on the one-direction cashflow, its liquidity, risk of policy changes etc.

Many ordinary Singaporeans do not earn a high annual salary of $100,000 and above. The average annual salary in Singapore is $63,312; averaging out $5,276 per month, inclusive of the employer’s CPF contribution. The Median Gross Monthly Income from work (including Employer CPF contributions) of full-time employed residents is $4,563 per month. In short, many Singaporeans are in the 7% tax bracket or under. This has not even taken into account tax reliefs to bring down the tax bracket even further to 3.5% or even 2% tax bracket.

You would probably be doing very well to be in the high end of the 15% tax bracket or annual earning of $159,999. This translates to a salary of about $13,333 per month (without bonus) or $10,667 (considering 3 months bonus) per month. I thought I would use this higher-end case as an example for discussion.

Consider a Singaporean man in his early forties having phased into MINDEF Reserve (MR) and earning an annual salary of $159,999. He has also maxed out his CPF SA by RSTU cash top-ups in his early thirties. Possible tax reliefs he can employ for his income level:

Tax Relief typeTax Relief Amount
Earned Income Relief
(Below 55 years old)
$1,000
Provident Fund$20,400
SRS contributions$15,300
NSmen (Inactive)$1,500
Parent relief (for 1 parent,
taxpayer does not stay with dependant)
$5,500
Total$43,700

The chargeable income is now $116,299 or brings him to 11.5% tax bracket. It would be a tall order to bring it down 7% tax bracket by maximising $80,000 tax reliefs: $159,999 – $80,000 = $79,999.

Nonetheless, the above table do not include other possible scenarios for tax reliefs to further bring down the chargeable income e.g. having children: Working Mother’s Child relief, Grandparent Caregiver relief, Foreign Maid Levy relief, Qualifying Child relief and even Parenthood Tax Rebate.

Some people feel that it is not as worth initiating RSTU cash top-up to your SA early in your work life, as low tax bracket means you don’t seemed to enjoy the higher tax savings that you might at a higher tax bracket later in life. At 3.5% tax bracket early in your career for example, you only enjoy $7,000 X 3.5% = $245 in tax reliefs.

The point I wish to make here is that it is not the end of the world when your SA reaches FRS. At 11.5% tax bracket, he is missing out on $7,000 X 11.5% = $805 tax reliefs annually; at 7% tax bracket, $7,000 X 7% = $490 tax reliefs. Even if we look at the highest tax bracket of 22%, he only missed out on $1,540 for not being able to RSTU cash top-up his SA.

Comparatively, if his SA is maxed out at prevailing FY2020 FRS of $181,000, the interest earned (4% p.a.) is $7,240.

To me, it does not make sense to defer your RSTU cash top-up your SA to FRS, if it does not yield any real advantages. The earlier one reaches FRS in his SA, the faster he allows the nature of compounding interest to take over.

Is deferring of RSTU cash top-up to SA being overrated to you?

4 thoughts on “Defer RSTU cash top-up till Income Level reaches higher tax bracket, yay or nay?

  1. The question then is whether or not you would contribute over 7k to your SA each year?
    As I understand, 7k is simply the limit of tax relief, not that max amount to contribute.
    In fact, you can always do voluntary contribution to all 3 accounts (OA, SA, MA), and then transfer from OA to SA. This would probably be a much quicker route to max out SA.

    If we don’t do this route, then we must admit the tax relief counts for something. At that point, it is simply a personal decision of how much it counts for.
    For me, I will advise my kids to do voluntary contribution to MA first. This is tax deductible and should be done early in their career as it will be capped should your salary increase in the future.
    The next contribution will be RSTU. Even then, no rush to top up more than 7k. Or at all if your tax bracket is low. This is because the 7k can still be used to invest in cash. Which may yield you more than 4% PA.
    Don’t know how to invest? Perhaps it is a good time to learn.

    Only after FRS is maxxed will I think of SRS. And again, only if the tax bracket is decent. O/w, cash can still be used for investment. shrug.

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    1. Thanks for your sharing your thoughts and perspective!

      I think from my perspective my thoughts is that why there are a number who are advocating always to wait for a higher bracket and put off doing RSTU cash top-up till much later on. Most Singaporeans are average wage-earners in this current climate. Not putting us down, but even reaching 11.5% tax bracket may be out of reach for many; or even happen towards their late worklife e.g. late forties. By fifties, salaries would have tapered off or even reduce due to job redeployment.

      My idea is, even if you don’t contribute the max of 7K annually, a small contribution of $100 monthly (or $1200 annually) still goes a long way in building up one’s retirement sum. Also agree with you it doesn’t have to just SA alone; but VC to all 3 accounts or directly top up MA all the way till BHS level.

      Agree with you on advice to your dependants to top up MA first, as the contribution rate to MA is a higher percentage as compared to SA early in life, to maximise total tax reliefs earned over their lifetime.

      Agree with you on the liquidity / flexibility of cold hard cash over locking up in SA. Probably from the way I look at it, I want to build a financial safety net first. Having 4%/5% at FRS compounded over 20 good years (assuming I reached FRS in early thirties) is still good money and forms a bare minimum of maintaining my lifestyle after age 65 (with CPF LIFE monthly payouts forming the base) or at least a lump sum (excess above FRS) when I reach 55. I can’t tell if I would ‘screw up’ my investments or when the time comes I have to draw down in a down market, but I assure myself that I had built a small financial safety net in my younger days.

      Singaporeans definitely have to do more work in learning how to invest effectively and efficiently. The emergence of roboadvisors as well as lower fees/brokerage charges/commissions also help to reduce cost and take on the role of upping investment returns. By themselves however, investors struggle sometimes to even beat 4% compounded annual returns when they stock-pick e.g. a look at investors who stock-pick in Singapore stock market over several rounds of crisis.

      Thus also my last point on that RSTU cash top-up to SA for tax relief only forms a small component; there are many tax reliefs components by MOF, it depends really on how you share the reliefs between your family members sometimes. It’s a strategy usually to allow the higher income party to claim more reliefs (where applicable) to save on taxes.

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  2. first of all, this article is based on the assumption that the subject is not capable of achieving >5% returns per annum from other investments, and thus CPF becoming a very good instrument to achieve the best returns.

    So if i wanted to get max returns from CPF, below are the steps that i will take.

    1. In my early career when my salary is below the 7% tax bracket, i will focus on building my emergency funds and getting returns from high interest savings account (those with multipliers or category based interests).

    2. Once i hit the 7% tax bracket, which i assume that it will be aligned with the fact that i have also max out the savings account limit and the emergency funds, I will VC to MA (first) and RSTU to SA. I will not wait for higher tax bracket because the compounding returns in SA or MA is definitely worth more than the relief you are able to extract between the difference in 7% and 11.5% as the author has highlighted. Also, we need to remember that we are continiously contributing to OA/SA/MA through monthly contributions during employment, and there is a depleting pot that is eligible for tax relief the longer we wait to RSTU.

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    1. Generally I think for the purpose of the discussion, I wanted to focus on the fact that whether it’s Camp 1 or Camp 2, both camps already have the intention to do RSTU cash top-up to SA. It’s to provoke some thoughts on whether is it more worth it to do it latter than earlier.

      I agree with you that there are individuals who can achieve a good return e.g. > 5% per annum, the number of people who consistently achieve that (compounded) subsequently falls. The March stock market crash for example, there’s still a good number who are still down 20%-30% vested on SGX stocks. There are even those who have not recovered (paper losses) from counters vested in 2008 GFC or even 2015 China stock market crisis.

      I like the way you detailed your strategy. It is something I would do as well. The key point is not to wait or procrastinate. One of the good point you mentioned is on mandatory contribution depleting the pot that is eligible for tax reliefs. By the time you wait till your forties, your MA is proably maxed out, and overflow plus mandatory contribution to SA might mean that your room for tax reliefs for RSTU cash top-up is even much lesser.

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