[PB Notebook] Tax Credits and Tax Reductions... The Art of Tax Saving with Pension Accounts

The tax treatment of pension accounts follows an EET taxation structure: tax credit and tax deferral (Exempt) at the time of contribution, tax exemption (Exempt) during operation, and taxation (Tax) upon receipt. If you fully understand this EET taxation structure, you can prepare for retirement through tax savings including tax credits, tax deferral, and tax reductions.

Pension accounts provide tax credit and tax deferral benefits at the time of contribution. Typically, pension savings accounts or individual IRPs are called pension accounts, and personal contributions made for retirement purposes are eligible for tax credits upon contribution. For pension savings accounts, tax credits are available up to a limit of 6 million KRW, and for individual IRPs, including pension savings accounts, the limit is 9 million KRW. The tax credit rate is 15% if the total salary is 55 million KRW or less and the comprehensive income amount is 45 million KRW or less for those with earned income only; if exceeded, the tax credit rate is 12%. By utilizing tax credits during year-end tax settlement or comprehensive income tax filing, you can save up to 1.35 million KRW (9 million KRW x 15%), and considering the local income tax reduction effect (10% of the tax credit amount), the total savings can reach 1.485 million KRW.

In addition to personal contributions, severance pay received upon retirement can also be contributed to the pension account. The benefit of contributing severance pay to a pension account is tax deferral. When receiving severance pay, retirement income tax is withheld at source and you receive the net amount, but if contributed to a pension account, withholding is not applied and tax deferral is possible. The deferred tax can be used as principal for investment operation.

Pension accounts are tax-exempt during operation. For example, if you invest in domestic listed foreign ETFs and generate income, it is taxed as dividend income (15.4%, including local income tax) and combined with other interest and dividend income, if exceeding 20 million KRW, it is subject to comprehensive financial income taxation. However, pension accounts are characterized by no taxation during operation.

Pension accounts are taxed upon receipt, and tax savings depend on how the funds are received. For the principal on which tax credits were received and investment gains, pension income tax rates of 5.5% to 3.3% (including local income tax) apply depending on age: 5.5% for those under 70, 4.4% for those aged 70 to under 80, and 3.3% for those 80 and above.

For the principal of severance pay, the deferred retirement income tax rate is reduced by 30% when received as a pension, and if the pension receipt period exceeds 10 years, a 40% reduction applies to the amount received beyond the 10 years.

One point to note when receiving pension payments is that if the amount exceeds 12 million KRW for the principal on which tax credits were received and investment gains, comprehensive income tax filing is required. The applicable tax rate will be the lower of the comprehensive income tax rate or other income tax rate (16.5%, including local income tax), which may be higher than the existing withholding tax rate of 5.5% to 3.3%, so caution is needed.

Tax Accountant Donghyun Yoodong, KB Kookmin Bank WM Star Advisory Group