Decide whether to top up and how much, by weighing the tax you save against the money you lock away.
Open three things before you start: your rebuild sheet from lesson 1.4, your relief list from lesson 2.5, and your CPF account in another window. Set aside about twenty-five minutes. The CPF Board has a year-end cut-off for top-ups, so you need to decide and pay before that date. If you leave it until the last few days, you'll probably either skip the top-up or pick an amount without working it out.
You'll finish with one decision line for each top-up you're considering. Each line gives the amount, the tax saved, where the money goes, the date you'll pay and one sentence of reasoning. Your decision can be not to top up this year.
Shu Ting faces this choice in the first week of December. She understands how the relief works from lesson 3.1, "Tax relief on CPF cash top-ups". From lesson 3.3, "The relief cap and the order you claim in", she knows she is far below the relief cap. She still doesn't know whether to top up, or how much.
Choose two top-up amounts you could realistically make, one modest and one larger. Both must be within the current IRAS limit for that kind of top-up. Add two rows to your rebuild sheet, one for each amount.
For each row, take your expected chargeable income for the coming year and subtract the top-up. Run the result through the band formulas from lesson 1.4, "Rebuild your tax bill from scratch". Tax saved is your current tax minus this new tax.
Don't multiply the top-up by your marginal rate as a shortcut. A top-up can take your income across a band edge, the point where chargeable income moves into a lower tax band. The part of the top-up below that edge only saves tax at the lower rate, and you'll only see this if you do the full calculation.
Shu Ting expects chargeable income of S$83,000 (an invented example). She looks at a top-up to her mother of S$4,000 or S$8,000 (both example amounts). Her rates come from the practice table in lesson 1.4, so they are illustrative: a 10% band and a 6% band. Her income is S$3,000 above the band edge, so most of any top-up is relieved at 6%.
A S$4,000 top-up brings her chargeable income down to S$79,000. The first S$3,000 comes out of the 10% band and the last S$1,000 out of the 6% band. That saves S$300 + S$60 = S$360 in tax. An S$8,000 top-up brings it down to S$75,000: S$3,000 at 10% and S$5,000 at 6%, which is S$300 + S$300 = S$600 saved. The first S$4,000 saves S$360, but the second S$4,000 saves only S$240.
For each amount, write one line on when the money could next be used and for what.
A top-up to yourself goes into your own CPF retirement savings. Cash top-ups are irreversible, so you can't take the money back. Those savings are meant to build up your retirement savings and can't be withdrawn for other purposes. A top-up to a parent belongs to that parent as soon as it lands. It raises their retirement income, and if they die, whatever is left goes to their nominees. Whoever receives the top-up, treat the money as permanently gone from your own spending.
Shu Ting writes: Mum's RA, raises her monthly payouts, never comes back to me.
Open your budget and goals. For each amount, check that your emergency fund stays whole after the top-up. Then check that every goal in the next three to five years is still funded, whether that's a flat, a renovation, a wedding, a course or a career break. If an amount fails either check, cross it out. The tax relief doesn't make up for a top-up that leaves you short. For example, saving S$600 in tax and then borrowing S$3,000 on a credit card in March leaves you worse off.
Shu Ting's emergency fund is in place. The larger amount would delay the money she is setting aside for Wen's infant care fees. The smaller amount doesn't affect anything else in her plan.
To keep the decision honest, ask yourself whether you would still make the top-up if the relief disappeared tomorrow.
For a top-up to a parent who needs more retirement income, the answer is often yes, and the relief is a bonus. For a top-up to yourself made only because it is December, the answer is often no. That doesn't make the top-up wrong. It does mean the money has to be money you are sure you will never need before retirement.
Shu Ting's answer is yes. Her mother's payouts are small, and a top-up raises them for life. The tax saving is a bonus on a decision she would make anyway.
Write one line for each top-up: the amount, the tax saved, where the money goes, the date you'll pay and one sentence of reasoning.
Shu Ting's line reads: a S$4,000 top-up to Mum, saving S$360 tax (practice table). The money goes to Mum's RA, raises her payouts and does not come back. She'll pay by 5 December to clear the cut-off. Her reasons are that Mum needs the income and that the larger amount would delay Wen's care fund. She leaves the MediSave contribution from lesson 3.2 for another year.
She also adds a note for module 4. After this top-up her marginal rate would be 6%, and that rate matters if she makes an SRS contribution.
Now do the same with your own figures. Write the line for your own top-up decision, even if the decision is not to top up this year.
Write down your top-up decision: the amount, the tax saved, the money locked, the date you will pay it, and your reason.
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