5 to 10 Years Plan - Income Tax III

As I promised earlier, we will try to reduce the taxable income on this issue. Finally we have come to this point that grab everyone attention. CPF is not taxable (to some extent if your salary does not exceed the Ordinary Wage ceiling, for us we can leave it for now unless your salary is higher than $5,000 per month. More info on Ordinary Wage ceiling on this page.) and by contributing the full amount of CPF as early as possible we can avoid being included into the annual financial statement.

For fresh graduate, 5% rate is graduate rate (partial rate) for first year. Full contribution is 20% but for second year partial contribution is 15%. If you follow this link, there will be three options shows as below:

Option	Employer	Employee
1	Graduated Rate*	Graduated Rate*
2	Full Rate	Full Rate
3	Full Rate	Graduate Rate*

Here is the important part, go for option 2 if your financial is allowing you to do it. Comparison of your first and second year with full contribute to graduate rate contribute is shown below:

Option	Year 1	Year 2
Graduate Rate	5%	15%
Full Rate	20%	20%
Additional %	15%	5%

So, let us see, for instance your salary is $2,000. Every month you will get $1,600 for two starting year instead of $1,900 for first year and $1,700 for second year. So in first year after you contribute full rate instead of partial rate, every month you contributed more $300 (for $2,000 per month salary) and for a year you contribute more $3,600. So what is the catch?

If you still can't understand, please read again from old articles such as 5 to 10 Years Plan - Centre Provident Fund (CPF) and read the top part of this article again. I mentioned that the CPF is not taxable (to some extend in our case of entry salary level), so if your annual income is $24,000 after deducted $4,800 (20% full rate to your CPF) you left $19,200. And for annual income of 20,000 or lesser, you are free from the income tax!!! Below is the comparison chart between full and partial CPF contribution and income tax.

Option	Year 1	Year 2
Graduate Rate	5%	15%
Full Rate	20%	20%
Additional %	15%	5%
Additional Amount out of $2,000 per month	$300	$100
Annual Income after partial CPF reduction	$22,800	$20,400
Annual Income after full CPF reduction	$19,200	$19,200

I think you will be more clear with the table above. In this case, we "escaped" from income tax for two years with just some calculations. By the way, for income of $22,800 and 3.75% (if you don't know what rate is this, please check here), your income tax to the IRAS is $855 and $20,400 is $765. You can save total $1,620 from two years income tax.

Even though some of you guys who are so fortunate to get high salary and failed to reduce it below $20,000, you can save quite an amount of money from putting your money to full CPF contribution.

Some of you may ask why you want to put your cash into a black box which you only can open after 55 years old. The answer is CPF can be ultilized before this age and it is very flexible if you know how. I will stop here and if you want to know more about CPF ultilization, please check here when you have time.

In the meantime when I am preparing more text, you can get more information from the google ads. (True, because most of the link go to some investment portal that will give you general knowledge of what I wrote here. It won't waste your time if you are willing to learn more while waiting for the next article to come.)