Retirement Planning: Should You Prioritize Voluntary Contributions to Medisave or Retirement Sum Top-Up to Special Account?

Retirement Sum Top-Up (RSTU) and voluntary contributions to your Medisave account are both options for contributing to your CPF, but which one should you choose? According to financial expert, Christopher Tan, it's best to focus on voluntary contributions to your Medisave account first because it can be used to pay for insurance premiums, among other things. However, some people argue that building up their special account with RSTU is the better option. In this article, we'll explore the advantages and disadvantages of both options.

Advantages of Voluntary Contributions to Medisave Account

Contributing to your Medisave account first has several advantages. First, both the Medisave account and special account have similar interest rates of around 4% per annum. Second, both accounts share the combined tax relief limit of $8,000 per year. However, the Medisave account has one unique advantage: it can be used to pay for insurance premiums, such as the Integrated Shield Plan, CareShield Life, and MediShield Life. Therefore, contributing to your Medisave account first can be more useful than contributing to your special account.

Advantages of Retirement Sum Top-Up to Special Account

Some argue that contributing to your special account first is the better option because of the tax relief and the ability to build up the full retirement sum quickly. When you contribute to your special account, you can get a tax relief of $8,000 per year. Additionally, you can keep contributing until your special account reaches the full retirement sum, which is $192,000 in 2022. Once you reach the full retirement sum, your contributions will continue to build up your special account above this amount, and you can use your special account for investments. The main advantage of building up your special account is that you can reach the enhanced retirement sum earlier than others.

Disadvantages of Retirement Sum Top-Up to Special Account

Although the strategy of contributing to your special account first can be useful, it also has some disadvantages. First, there are limited investment options for your special account, and most of these options are low-risk, low-return products. Therefore, it's better to leave your special account in a 4% compounded interest account instead of investing in low-return products. Second, if you contribute to your special account first, your Medisave account may not reach the Basic Healthcare Sum (BHS) of $66,000. Contributing to your Medisave account after reaching the full retirement sum can earn you tax relief, but there may be no overflow of the Medisave funds to the special account funds if your Medisave account has not reached the BHS.

Conclusion

In conclusion, both retirement sum top-up to the special account and voluntary contributions to your Medisave account have their advantages and disadvantages. Contributing to your Medisave account first is recommended because it has more utility, and you can use it to pay for insurance premiums. However, building up your special account with RSTU can be advantageous because you can reach the enhanced retirement sum earlier. Ultimately, the choice depends on your personal financial goals and risk tolerance.