You will be able to explain when a voluntary MediSave contribution earns tax relief.
In November, Shu Ting's financial adviser friend suggested she put some cash into MediSave before year end, "for the relief". Shu Ting already had a CPF top-up to her mother on her list from lesson 3.1, Tax relief on CPF cash top-ups. Her question was simple: if she did both, would she get relief on both, or would one cancel the other out?
That is the question this lesson answers. Why you might want a voluntary MediSave contribution at all, and what the money can be used for, is covered in CPF Mastery: every account and the choices you control, lesson 3.3, Voluntary MediSave contributions and the BHS limit. Here the focus is the tax.
Before tax comes into it, two CPF limits decide how much you can contribute at all.
The first is the Basic Healthcare Sum, the most your MediSave can hold. You can only contribute up to the gap between your balance and the BHS. If you're at the BHS, there is no room, whatever the tax position.
The second is the CPF Annual Limit, which caps the total of compulsory and voluntary contributions going into your CPF in a calendar year. This is the one that catches higher earners. Your compulsory contributions through your salary count toward it, so if you earn a good salary, much of your room may already be used before you add anything.
The CPF Board shows your remaining room under both limits when you log in. You don't need to calculate either one yourself.
Shu Ting logged in. Her MediSave was well below the BHS, so that limit wasn't a problem. But her compulsory contributions had used most of her annual limit. In this example, the room left was S$2,500. That was the most she could put in, whatever she had planned.
Here is where it gets fiddly. A voluntary contribution to MediSave can qualify for income tax relief, but which relief it counts under depends on your situation. For an employee, a cash top-up to MediSave may be treated as part of CPF cash top-up relief. For a self-employed person, voluntary MediSave contributions can instead count under the CPF relief for the self-employed. IRAS has changed these arrangements in recent years, so read the current pages before you plan.
The consequence is what matters. If your MediSave contribution falls under the same relief as your retirement top-ups, it shares that relief's limit. Every dollar of relief you take for MediSave is then a dollar of limit you can't use for a top-up to your own retirement savings. You don't get relief twice on the same room.
That answered half of Shu Ting's question. Her planned top-up was for her mother, which sits under the separate family limit. A contribution to her own MediSave, if it fell under the relief for her own top-ups, would use her own limit and leave the family limit alone. So the two could both earn relief, as long as neither went over its own limit.
There is one more layer. Every personal relief, including CPF top-up relief and any relief for MediSave contributions, counts toward the cap on total personal reliefs for the year. Lesson 3.3, The relief cap and the order you claim in, covers the cap in detail.
For most people the cap is a long way off. For a high earner who already claims family reliefs and plans an SRS contribution and two top-ups, it can arrive sooner than expected. Once you reach it, a further MediSave contribution earns no relief at all. The money still goes into MediSave and still earns MediSave interest, but the tax reason for doing it has gone.
With an example contribution of S$2,500, her chargeable income for the coming year would fall from S$83,000 to S$80,500. Under the practice table from lesson 1.4, Rebuild your tax bill from scratch, all of that comes out of the 10% band, so the relief would save S$250.
The money itself would be usable only for approved healthcare costs and MediSave-approved premiums, under MediSave's withdrawal limits. Shu Ting's emergency fund was in place, and she had no near-term goal that needed the S$2,500, so locking it into healthcare money didn't worry her.
She did notice one interaction. Her S$83,000 sits only S$3,000 above the edge of the 10% band. If she used S$2,500 of that on MediSave, a top-up for her mother would mostly save tax at 6%, not 10%. Each relief she adds makes the next one worth a little less once she crosses into a lower band. Lesson 3.4, Decide your top-up for the year, deals with that properly.
Three checks cover it. Your room under the BHS and the CPF Annual Limit, from your CPF account. The relief your contribution falls under, and whether it shares a limit with your top-ups, from the IRAS pages. And how close you are to the relief cap, from your relief list in lesson 2.5, List every relief you qualify for.
For the activity, log in to your CPF account and find the room you have for a voluntary MediSave contribution, then work out what relief it could give at your marginal rate.
Write the room left in your MediSave for a voluntary contribution and the relief it could give.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).