Voluntary Contribution of Mpf

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  • Topic: Individual Retirement Account, Taxation, Economic Growth and Tax Relief Reconciliation Act of 2001
  • Pages : 2 (287 words )
  • Download(s) : 169
  • Published : December 10, 2012
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Both employers and employees need to contribute 5% of their salary to their MPF account. It is mandatory. However, they may choose to contribute more upon the mandatory amount. The extra amount will be considered as voluntary contribution.

The mandatory amount they contribute to MPF account can enjoy tax deduction under Salaries Tax. The maximum amount of tax deduction for 2011-2012 is $12000. However, any voluntary contributions cannot enjoy tax deduction.

• As voluntary contributions cannot enjoy tax deduction, people are not willing to contribute more to their accounts and result of limited contribution. In order to solve the problems, it is important to provide tax incentives to attract them to contribute more. The government can provide tax deduction or tax deferred for the voluntary contribution. Take American 401k system as an example, voluntary contribution are "tax-deferred"—deducted from paychecks before taxes and then taxed when a withdrawal is made from the 401(k) account.

Social effects

Advantage:

• Reduction of lifetime tax burden through the deferral/deduction of tax payments • More money when they retire (holding other things being constant) • Less reliance on government (Comprehensive Social Security Assistance (CSSA) Scheme)

• Disadvantage:

• Government will receive less income from tax, service funded by the government will be affected, like medical services and education services.

Economic effects:

• Advantage:

• Stimulus to participate- tax-deferred retirement saving accounts, such as 401(k) plans and individual retirement accounts (IRAs), has increased significantly in the United States since the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The annual contribution limits of 401(k) plans and IRAs have been raised to $16,500 and $5,000, respectively, through 2009.

• Facilitate the financial market....
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