[Practical Finance] Increased Tax Credits for IRP... Bond Investments Also Possible in ISA

IRP Tax Credit Limit Increased to 9 Million KRW This Year
Up to 20 Million KRW Can Be Deposited Annually into ISA Accounts

Kim Ji-won, a worker in her 30s, recently opened an Individual Retirement Pension (IRP) account. Until now, she had no capacity to invest or save due to repaying student loans, but starting this year, she can use a certain amount of her salary as discretionary funds. The first choice she made this year to start investing was the IRP. She said, "I envied colleagues who received the '13th month salary' during year-end tax settlements by doing tax-saving investment (setech: tax saving + financial technology) well," adding, "I heard that the IRP tax deduction limit will increase to 9 million KRW this year." She also added, "A big purpose is to use it as a retirement pension after retirement."

Increased IRP Tax Deduction Limit

This year, the tax deduction limit for IRP has increased, drawing significant interest from workers. The IRP tax deduction limit rose from 7 million KRW last year to 9 million KRW this year. The tax deduction limit for pension savings also expanded from 4 million KRW to 6 million KRW. The total tax deduction limit for pension accounts, combining pension savings and IRP, is 9 million KRW. Along with the expanded tax deduction contribution limits, the criteria for applying tax deduction rates have also been partially relaxed. The comprehensive income thresholds for applying tax deduction rates of 16.5% and 13.2% were raised from 40 million KRW to 45 million KRW. For example, if the comprehensive income is 43 million KRW, the previous tax deduction rate was 13.2%, but from this year, it increases to 16.5%. In this case, the tax deduction amount can increase by up to 561,000 KRW.

If a worker earning less than 55 million KRW deposited 7 million KRW into an IRP last year, they could receive a tax deduction benefit of 1,155,000 KRW in the year-end tax settlement. If they deposit 9 million KRW into the IRP this year, they can receive a tax deduction of 1,485,000 KRW in the next year's year-end tax settlement. Park Hyung-jin, a worker in his 40s, said, "I plan to deposit a little each month to reach the tax deduction limit by the end of the year."

The reason IRP is gaining attention is that it can secure retirement assets while enhancing long-term stability. The discretionary funds placed in the IRP can be managed through exchange-traded funds (ETFs) or Target Date Funds (TDFs). IRP funds can be received as a pension if the account has been held for more than five years and the subscriber is over 55 years old. Hyun Deuk-hyun, WM Masters Specialist at NH Investment & Securities, said, "Since the sharply increased interest rates are likely to gradually return to past levels, stock and bond returns will also improve gradually," adding, "For workers who find it difficult to time investments precisely, it is advisable to gradually purchase ETFs investing in representative domestic and international stocks and bonds."

NH Investment & Securities' 100-Year Life Research Institute recently suggested strategies for utilizing pension tax reforms, including △contributing up to the maximum tax deduction limit of 9 million KRW △actively using additional contribution limits if retirement is near △choosing the more advantageous method between comprehensive taxation and separate taxation △and additional tax savings by receiving pensions through IRP accounts.

They estimated that saving in pension accounts at the maximum tax deduction contribution limit for just 10 years could return about 11.88 million to 14.85 million KRW through tax deductions. Retirees or pensioners should actively utilize the maximum contribution limit of 18 million KRW for pension accounts. Although the tax deduction limit is 9 million KRW, pension income tax of 3.3% to 5.5% is imposed on additional contributions. If managed in a general account, interest and dividend income tax of 15.4% applies. If the annual pension receipt exceeds 12 million KRW, one should choose the more advantageous method between separate taxation and comprehensive taxation. If the combined taxable income including pension and other income is below 14 million KRW, comprehensive taxation with a 6.6% tax rate is advantageous. For incomes exceeding 50 million KRW, the comprehensive tax rate ranges from 26.4% to 49.5%, so choosing separate taxation with a 16.5% tax rate is better. For retirees expecting large severance pay or with short working periods resulting in low service year deductions due to mid-term settlements, choosing pension receipt through IRP rather than lump-sum payment can provide tax-saving effects.

Tax-Free Benefits of the All-Purpose ISA Account

After filling the 9 million KRW limit in the IRP account, Kim plans to join a Individual Savings Account (ISA). Not only can she enjoy significant tax benefits, but she also wants to invest in bonds. ISA was introduced in 2016 as a financial product offering tax benefits to help citizens build wealth. It is popular because it allows investment in various financial products such as stocks, funds, and equity-linked securities (ELS) within a single account.

Up to 20 million KRW can be deposited annually into an ISA account. To enjoy the benefits, one must subscribe for at least three years, with a maximum extension of two years, allowing up to five years of operation. This means a maximum deposit of 100 million KRW over five years. The limit was set because the benefits are substantial. First, up to 2 million KRW of interest and dividend income generated during the minimum three-year subscription period is tax-exempt. Amounts exceeding this are taxed at a relatively low rate of 9.9% and are subject to separate taxation from comprehensive financial income taxation. According to data submitted by the Korea Financial Investment Association to National Assembly member Park Jae-ho (Democratic Party), the number of ISA accounts increased from 1.94 million at the end of 2020 to 4.63 million at the end of last year.

Moreover, taxes apply only to net profits after offsetting gains and losses across multiple financial products within the account. For example, if a 4 million KRW profit was made from stocks and a 1.5 million KRW loss from ETFs within the ISA, only 2.5 million KRW is taxable. Applying the 2 million KRW tax-free limit leaves 500,000 KRW subject to the 9.9% tax rate, resulting in a tax of 49,500 KRW. If the same gains and losses occurred in a general securities account, a 15.4% interest income tax of 616,000 KRW on the 4 million KRW stock profit would be due. Kim Sang-hoon, Executive Director of Digital Marketing at Samsung Securities, emphasized, "The ISA account is an essential account for investment, often called the master key for tax savings."

ISA Tax Benefits Expanded to Bonds

ISA's tax benefits have now expanded to bonds. Following a legal amendment at the end of last month, direct bond investment is now possible within ISA accounts, and securities firms are rushing to launch ISA bond trading services. When investing in bonds through a general account, 15.4% tax is withheld on interest. However, investing in bonds through an ISA exempts tax on up to 2 million KRW of interest and dividend income, and the tax rate on amounts exceeding this is only 9.9%.

ISA accounts come in three types: discretionary, where financial companies manage the account; trust, where individuals select products and delegate management; and brokerage, where individuals manage directly. Bond investments are expected to be mainly conducted through brokerage-type ISA accounts, which have been actively trading bonds. Currently, securities firms offering bond investment through brokerage-type ISA accounts include Mirae Asset Securities, KB Securities, NH Investment & Securities, Samsung Securities, and Korea Investment & Securities. The biggest feature of brokerage-type ISA is that one can invest up to 20 million KRW annually, totaling 100 million KRW, and since gains and losses from various financial products invested within the ISA are aggregated, trading bonds together can provide even greater tax benefits. Jeon Dong-hyun, Director of Product Planning at NH Investment & Securities, said, "In a high-interest-rate era where individual investors' interest in bonds has increased, providing bond trading services through brokerage-type ISA is a great opportunity for individual investors."