Legally No Need to Pay Taxes?…5.64 Million Subscribers to the 'Mannung Tongjang' [Aldon Sseul Jap]

Editor's NoteUseful and money-saving miscellaneous encyclopedia. 'Aldonssuljab' will serve you only the truly 'money'-worth information among countless economic articles.

It is said that even the rich have exactly two things they fear and cannot avoid.

They are death and taxes.

The fact that a whopping 15.4% tax is imposed on the precious money earned through hard-earned investments.

It seems like it kills your motivation to invest, right?

But did you know there is a legal way to avoid paying taxes?

As the saying goes, "Knowledge is power!"?in finance, too, the more you know, the better you can protect your money.

Now, let me tell you how to legally avoid paying taxes.

Everyone but me has signed up? The 'All-Purpose Account' with 5.646 million subscribers

The number of subscribers to the so-called ISA (Individual Savings Account) has

surpassed 5,646,000 people in 8 years and 5 months since its launch in 2016.

The total subscription amount is reported to be 30.2722 trillion KRW.

What exactly is ISA that has gained such huge popularity?

ISA stands for Individual Savings Account, known in Korean as 'Gaein Jonghap Jasangwanri Gyejwa'.

But why is it called an 'all-purpose account'?

Because with this one ISA account, you can manage various financial products ranging from bank deposits to stocks, funds, ETFs (Exchange-Traded Funds), and ELS (Equity-Linked Securities).

Above all, the biggest advantage is that depending on your income, you are exempt from taxes on profits up to 5 million or 10 million KRW.

For reference, in Korea, interest income or dividend income is taxed at 15.4%.

Why you should open an ISA account even now

Since its introduction in 2016, the ISA account has gained great popularity, surpassing 5.64 million subscribers in 8 years and 5 months.

If you have not signed up yet, we strongly recommend you to open one before the end of this year.

This is because of the financial investment income tax.

The financial investment income tax is a system that imposes a 22-27.5% tax on income exceeding 50 million KRW from financial investments such as stocks, bonds, and funds.

With its implementation scheduled for next year, the political circles are currently debating whether to postpone, abolish, or implement it as planned from 2025.

Regardless of the outcome, signing up for an ISA account is a 'benefit'.

Depending on the subscription type, you can enjoy tax exemption up to 5 to 10 million KRW, and for amounts exceeding the tax exemption limit, you can enjoy a tax-saving effect with a reduced tax rate of 9.9% instead of paying the full 15.2% tax.

You can invest up to 40 million KRW per year, with a total of 200 million KRW over 5 years, and upon maturity, you can transfer to a pension account for an additional 10% tax credit (up to 3 million KRW).

Most importantly, it is advantageous to open an ISA account as soon as possible.

Even if you open the account but do not make deposits, the account remains active,

so you can invest in the third year after opening the account and still enjoy tax exemption benefits even if you close it.

Another point is that young people with lower income are especially encouraged to sign up early.

ISA accounts offer greater benefits to those with lower income levels,

so if you join ISA when your income is low, the ISA account will be maintained as a low-income type at maturity,

allowing you to enjoy benefits according to the income conditions at the time of subscription.

'All-Purpose Account'?Where, How, and What Products Should You Sign Up For?

By now, you might be thinking,

"Ah, I get that ISA accounts are good. So where and how do I sign up?"

You can open an ISA account through bank or securities company applications (apps), websites, or by visiting in person.

ISA accounts are divided by subscriber type into general, low-income, and farmers/fishermen.

Since farmers/fishermen apply only to those with income below 38 million KRW, I will mainly explain the general and low-income types.

The general type is for residents aged 19 or older, and workers aged 15 to under 19.

On the other hand, the low-income type is for workers with total salary below 50 million KRW or business owners with total income below 38 million KRW.

Both general and low-income types share the same mandatory period of 3 years and an annual subscription limit of 20 million KRW (total 100 million KRW).

However, there is a difference in tax exemption limits.

As the name suggests, the low-income type offers better tax exemption benefits.

The low-income type is tax-exempt up to 10 million KRW, while the general type is tax-exempt up to 5 million KRW.

To subscribe to the low-income type, submission of income verification documents is required.

There is also a point to note.

Previously, those subject to comprehensive financial income taxation were restricted from subscribing, but now even wealthy individuals can open ISA accounts.

However, tax exemption benefits are not available, only separate taxation benefits apply.

Also, please note that only one ISA account can be opened, whether at a securities company or a bank.

There are three types of ISA products: brokerage type, trust type, and discretionary type.

If you want to entrust an expert, choose 'discretionary type'.

If you want to invest directly, it is better to choose 'trust type' sold by banks or 'brokerage type' sold by securities companies.

If you want to invest directly not only in deposits but also in ETFs or stocks, 'brokerage type' is recommended.

So how much tax can I actually save?

With tax rates of 15.2% or 9.9%,

and distinctions between low-income and general types,

it might seem complicated and hard to grasp the actual tax-saving effect.

Let me assume I made a profit of 15 million KRW from investments this year.

Scenario ① If I did not open an ISA account,

15 million KRW profit would be taxed at 15.2%, so I would pay 2.28 million KRW in taxes.

Scenario ② If I opened a general ISA account,

tax exemption applies up to 5 million KRW,

so tax applies only on 10 million KRW (15 million - 5 million) at 9.9%.

That means paying 990,000 KRW in taxes.

Scenario ③ Finally, if I opened a low-income ISA account,

tax exemption applies up to 10 million KRW,

so tax applies only on 5 million KRW (15 million - 10 million) at 9.9%,

resulting in 495,000 KRW in taxes.

Can you see it at a glance?

The tax difference between not having an ISA account and having the best-benefit low-income type is more than fourfold!

Any downsides to ISA accounts?

So far, there seems to be no reason not to open an ISA account,

but you might wonder if there really are no downsides.

To conclude, there are some downsides, but the advantages outweigh the disadvantages!

First, unlike general accounts, ISA accounts have a mandatory subscription period of 3 years.

You must not cancel within 3 years to enjoy benefits. If you cancel early, you have to return the tax benefits you received.

Second, there are withdrawal restrictions.

You can freely withdraw the principal, but to withdraw profits earned from investments, you must cancel the account.

Therefore, it is recommended to cancel and re-subscribe after fulfilling the 3-year mandatory period.

There is another reason to re-subscribe every 3 years.

Only by canceling and re-subscribing every 3 years can you enjoy the tax exemption benefits of 5 to 10 million KRW.

Third, investment in overseas-listed stocks is not allowed.

You cannot enjoy ISA benefits by buying popular stocks loved by Korean investors abroad, such as Nvidia or Tesla.

This is because ISA accounts are government-supported products intended to promote domestic investment rather than overseas investment.

However, you can invest in ETFs listed domestically that track US indices.

[Image source=Yonhap News]

Now, do you have a clearer picture of ISA accounts?

If you plan to invest or are already investing, ISA is a must-have.

Saving seed money and investing are important,

but reducing unnecessary costs during the investment process is also part of 'financial technology'.

Let's invest smartly and earn more.

I hope this session was valuable information to protect your money. That's all for now.

Thank you.