The 401(k) and CPF (Central Provident Fund) plans are a part of retirement savings systems. The former is a part of the private security system in the US, and the latter is a Singapore government-sponsored social security system.
An employee in the US can get tax benefits by participating in a voluntary 401(k). At the same time, an employed person in Singapore has to legally contribute a portion of a wage to CPF as tax-deductible.
The purpose of a 401(k) plan serves to create retirement savings for retirement, while a CPF plan is multi purpose-driven. An owner of the CPF plan can use it to fund the home purchase, medical needs, and insurance protection, besides retirement income.
CPF vs. 401(k): Overview
1. Is the 401(k) Plan the same as CPF?
A 401(k) plan is a voluntary tax-advantaged savings plan to encourage Americans to save for retirement. CPF is a mandatory government-sponsored plan for retirement income, healthcare, homeownership, and insurance, and each employee in Singapore must participate.
2. Is Social Security the same as CPF?
Yes, the CPF system functions as a crucial role in providing social security benefits to Singaporeans. Unlike 401(k) plans, participants and employers must contribute to cover working people’s needs after reaching retirement age.
The table below highlights the differences between 401(k)s and CPF:
| CPF | 401(k) | |
|---|---|---|
| Countries | Singapore | The United States of America |
| Coverages | Retirement, Homeownership, Education, Medical, and Insurance | Savings |
| Employee contributions | 20% | Voluntary |
| Employer contributions | 17% | Employer-match contributions |
| Compulsory | Yes | No |
| Return | 2.5% – 6% | Depends on investment performance |
| Withdrawal age | 55 | 59.5 |
| Withdrawal requirements | Permitted partial withdrawals to increase after 55 until full amount upon age 65 or above | Penalty-free withdrawals on or after 59.5, and compulsory full withdrawal at 73 or 75 |
| Taxation | Tax deductible up to S$14,000 for employees and their family | Tax benefits for contributions to traditional 401(k) & withdrawals from Roth 401(k) |
| Portability | An individual savings account separate from employers | A leaving employee should cancel and roll over the previous 401(k) plan into a new 401(k) plan or a savings plan of similar nature. |
Features and Benefits Comparison
The following are comparisons of characteristics of CPF and 401(k):
1. Employee contributions
- CPF: 20%
- Benefits: high proportion and high savings rates for workers
- 401(k): USD22,500 for 2023
- Benefits: employees can deduct taxes from contributions on paychecks.
2. Employer contributions
- CPF: 17%
- Benefits: employees benefit from employers’ high contributions.
- 401(k): employers can match dollar-for-dollar or 50 cents-for-dollar with an employee’s contributions.
- Benefits: workers increase savings through employers’ contributions.
3. Investment options
- CPF: interest rates for 4 types of accounts: ordinary account: up to 3.5%, special account: up to 5%, Medisave account: up to 5%, retirement account: up to 6%
- Benefits: Workers have any interest returns from their contributions
- 401(k): up to investment fund performance
- Benefits: Employees have an abundant choice in investments suitable to their needs.
4. Withdrawal rules
- CPF: workers can begin withdrawing the funds from 55.
- Benefits: employees can supplement their living with savings from CPF accounts.
- 401(k): withdrawal from 59.5
- Benefits: workers postponing withdrawals to later age can get larger tax deductions.
5. Taxation
- CPF: the respective contributions are tax-deductible for employees and employers.
- 401(k): contributions are tax-deductible for employees and employers, and withdrawal at retirement age is tax-advantaged.
6. Portability
- CPF: employees do not need to change their CPF accounts due to changes of employers as their CPF accounts are separate from employers.
- Benefits: account flexibility and easy account management.
- 401(k): Benefits accrued from a previous employer’s 401(k) plan can roll over to a new employer you are working for.
Eligibility and Availability
Eligibility
- CPF
As the CPF is a legally compulsory retirement scheme for the working population in Singapore, an employee who is a Singapore citizen or permanent resident is eligible for the CPF scheme.
- 401(k)
To the contrary, 401(k) plans are a voluntary and employer-sponsored scheme that entitles employers and employees to tax benefits on contributions and benefits payouts on retirement. Some main requirements for participating in a 401(k) are: a worker must be 21 and complete 12 months of service before joining the scheme.
Availability
- CPF
A CPF is a mandatory public retirement system that requires all employees and employers of Singapore citizens and permanent residents to participate in the scheme. Workers not above are exempt from contributions, and neither are Singapore employees working overseas.
- 401(k)
A 401(k) is an employer-sponsored plan under the tax act in the United States. The voluntary tax-advantaged plan gives financial incentives to employees and employers to set up retirement benefits in the US and is available to US citizens and permanent citizens.
Risk and Considerations
Both CPF and 401(k) plans are long-term savings plans offering employees retirement living similar to their employment level. Significant factors may affect the returns of a retirement plan leading to changes in an employee’s living style.
The following factors may affect the amount of a retirement sum when you intend to draw down 401(k) or CPF money from your account.
Investment risk
- CPF
The Singapore government offers participants interest rates of 3% to 6% on participants’ contributions and guarantees minimum capital on an ordinary account. In return, contributors could forfeit higher investment gains in exchange for the minimum rates of return on the capital.
- 401(k)
Most employer-sponsored 401(k) plans offer vast choices of investment vehicles, e.g., stocks, exchange-traded funds, mutual funds, annuities, and bonds. Employees can decide what to invest in. However, without consulting financial experts, employees with little or no investing knowledge could encounter a high chance of loss.
Inflation risk
- CPF
Though an interest-guaranteed CPF account gives you a stable and predictable return, you may risk losing the real value of money eaten by inflation at 6.625% last January.
- 401(k)
A 401(k) offers various investment choices like stocks, bonds, mutual funds, and ETFs. Most of them can hedge well against inflation and increase the real value of your savings.
Contributions and Withdrawal Rules
1. CPF
Contributions
A contributor has to deduct 20% of wages, while an employer should deduct 17% in payment to an CPF account. The CPF board keeps the wage cap of contributions to S$6,000 and reviews the cap regularly.
Besides, a participant’s CPF account comprises 3 sub-accounts: Ordinary, Medisave, and Special accounts. More than 60% of contributions go into the Ordinary accounts, with the rest splitting over the other 2 accounts for a worker aged 35 or younger. At an older age, like 70 or above, more than 80% of contributions go into Special accounts where the funds get a higher interest rate.
Withdrawals
The Central Provident Fund (CPF) board sets out some withdrawal rules when participants want to draw down their CPF contributions with the return from their retirement plans after reaching a specified age.
They can withdraw up to 50% of their savings at age 55 and up to full retirement funds at age 65.
Besides CPF withdrawals, contributors can choose an alternative: CPF Life. Created by the Singapore CPF board, CPF Lifelong Income for the Elderly (CPF Life) is a national longevity annuity scheme guaranteeing lifelong payments to participants as long as they live.
CPF Life is available to persons of the following:
- Singapore citizens and permanent residents,
- Born in 1958 or after,
- With a balance of $60,000 at the start of the payout.
2. 401(k)
Contributions
What a 401(k) plan offers in perks is employers’ contributions. An employer may pay dollar-for-dollar or 50-cents-for-a-dollar contributions. For example, if a worker contributes $100, an employer also pays $100 or $50 to his account in the plan.
The Inland Revenue Service (IRS) caps and regularly reviews the contribution limit for tax deductions. The tax-deductible cap for 2023 is S$22,500.
Withdrawals
Members can withdraw their funds penalty-free after 59.5. Besides, participants have other 2 options: 1. Let the funds stay in their accounts as long as they need them, 2. Roll over the funds into Individual Retirement Accounts (IRAs) for investments and savings. But 401(k) members should begin withdrawing funds at age 73 or 75 (depending on birth years), or be subject to penalty as specified by the IRS otherwise.
Taxation
Unlike other countries or regions, Singapore has no bilateral tax treaty agreement with the US; therefore, the tax treatments of CPF and the counterpart of 401(k) are different.
- CPF
If you are an American citizen or permanent resident working in Singapore, you are exempt from contributions from January 1, 2003. Therefore, all contributions are subject to voluntary and income tax to the US and Singapore tax laws. Furthermore, CPF participants must pay taxes for income earned from their CPF investments.
- 401(k)
Like CPF, US citizens or permanent residents making 401(k) contributions are deemed disposable income after tax by the authority.
Portability and Flexibility
A CPF account is registered with the CPF Board of Singapore and is separate from employers’ finance. A worker can use the same registered account no matter how many employers they work for but is only subject to a tax-deductible contribution limit.
Unlike CPF, a 401(k) is voluntary and employer-sponsored. A leaving employee should roll over his vested existing benefits into a new plan of similar nature or an individual tax-advantaged scheme.
Additional Support and Resources
Retiring is a change of lifestyle after work. Sound financial planning makes your retirement life worry-free regarding expenditure on health, daily expenditures, leisure activities, and mental health.
Besides maximizing the benefits brought by the CPF and 401(k), you should aim to have a well-planned retirement beforehand, including:
- Financial advisors: Acting as a professional, a financial advisor should give you all-round analysis and advice about your financial planning for pre and at retirement living according to your aspirations.
A sound financial plan is what you need on how and what you do to achieve your retirement targets. The earlier you plan for a sound financial plan, the sooner you will achieve your goals. A trustworthy financial advisor should help you with this.
- CPF and 401(k) resources: Online resources can provide rich materials in planning your retirement. The CPF Board of Singapore supplies numerous resources like a contribution calculator, CPF Life payout estimator, and other retirement resources, which are helpful to members and interested parties.
Besides the CPF board, the IRS of the US provides all the information you need to set up a 401(k) plan if you are a US citizen or permanent resident.
See Also: MOE Tuition Loan vs CPF Scheme and Basic Retirement Sum CPF
Final Thoughts
A 401(k) is a voluntary and employer-sponsored scheme, while CPF is a mandatory government-sponsored plan. Both allow employers’ and workers’ contributions and are also tax-advantaged. However, you should look into the tax and other regulatory implications regarding your tax status and decide wisely on the 2 plans.
Key takeaways
- CPF is a public retirement system in Singapore, while 401(k) is a US retirement savings plan.
- A 401(k) plan is a voluntary and employer-sponsored plan. CPF is a compulsory and government-sponsored plan.
- Both are tax-advantaged and facilitate employer and employee contributions.
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