Remember '6 Million and 3 Million' to Get Back 1.48 Million Won... No More Confusion Over Pension Savings and IRP [Real Asset Management]

Contribute in the Order: Pension Savings → IRP → ISA → Pension Savings
6 Million Won for Pension Savings... 3 Million Won for IRP
Tax-Free Benefits with 20 Million Won Annual ISA Investment
Additional 9 Million Won Contributions to Pension Saving

The year-end tax settlement season is approaching. In Korea, there are three main tax-saving financial products: pension savings accounts, Individual Retirement Pension (IRP) accounts, and Individual Savings Accounts (ISA). By making good use of these three products, you can not only enjoy tax benefits but also secure your retirement in one go. To maximize these benefits, it is essential to know the correct order and limits for contributions. Here is a simple, easy-to-understand guide for those who find themselves searching for this information every year.

Pension Savings First, Then IRP... Limits Are 6 Million and 3 Million Won: Remember the 'IRP 30% Rule'

If you are an office worker, you should first open a pension savings account, an IRP account, and an ISA account. To maximize tax benefits, the order of contributions is important. Remember this sequence: 'Pension Savings → IRP → ISA → Pension Savings.'

You can receive a tax deduction of up to 9 million won per year by combining contributions to pension savings and IRP accounts. The deduction rate depends on whether your pre-tax annual salary is above or below 55 million won. For salaried employees, the deduction rate is 16.5% if your pre-tax annual salary is 55 million won or less, and 13.2% if it exceeds 55 million won. For example, if your salary is 55 million won or less and you contribute 6 million won to a pension savings account, you can get back 990,000 won (6 million x 0.165). If your salary exceeds 55 million won, you will receive 792,000 won (6 million x 0.132) in tax refunds. Note that for comprehensive income, the threshold is 45 million won per year.

If you contribute the maximum deductible amount of 9 million won per year by combining pension savings and IRP accounts, you can receive a refund of 1,485,000 won (9 million x 0.165) or 1,188,000 won (9 million x 0.132) at year-end tax settlement, depending on your income bracket.

Can you simply deposit 9 million won into either the pension savings or IRP account? The optimal split is '6 million won in pension savings + 3 million won in IRP.' There is a reason for this. Pension savings accounts allow partial withdrawals within the principal amount, which is useful if you need funds urgently for things like a real estate down payment or surgery. In contrast, IRP accounts do not allow early withdrawals. Since pension savings accounts offer tax deductions for up to 6 million won per year, it is best to contribute this amount first.

The deduction limit applies individually. Therefore, for dual-income couples, it is more advantageous for each spouse to contribute 9 million won rather than pooling contributions into one account. This can result in a larger total refund.

Once you have memorized the 6 million won for pension savings and 3 million won for IRP, the next step is to decide what to invest in. As mentioned earlier, pension savings accounts allow you to freely allocate to risk assets, so you can invest 100% in stocks if you wish. However, IRP accounts are different. Only up to 70% of IRP funds can be allocated to risk assets; the remaining 30% must be invested in safe assets.

In summary, remember the contribution order: Pension Savings → IRP. The annual deduction limits are 6 million won and 3 million won, respectively. When it comes to asset allocation, just remember one thing: for IRP, follow the '30% rule'. By following these principles, you can receive up to 1,485,000 won (or 1,188,000 won) in tax refunds every year.

ISA Account: Annual Limit of 20 Million Won... Must Meet 3-Year Holding Requirement

If you are just starting your career, first fill the annual tax-deductible limit of 9 million won in your pension savings and IRP accounts, then turn your attention to an ISA account. While personal pension accounts are about getting tax refunds, ISA accounts help you pay less tax in the first place. With an ISA account, you can receive tax exemption on gains up to 2 million won after netting profits and losses. Any gains above 2 million won are subject to a separate 9.9% tax.

For example, if you earn a profit of 5 million won from a KOSPI200 ETF in your ISA account and incur a loss of 2 million won from stock A, only the net profit of 3 million won is taxable. Since the first 2 million won is tax-exempt, you only pay tax (3 million - 2 million = 1 million won x 0.099) of 99,000 won on the remaining 1 million won.

The annual contribution limit for an ISA is 20 million won, allowing you to contribute up to 100 million won over five years. Early termination is possible, but you must maintain the account for at least three years to receive the tax exemption and separate taxation benefits. In other words, after three years, you can close your ISA account and still enjoy the tax benefits.

If you have fulfilled the mandatory three-year holding period this year, consider transferring your ISA funds into a personal pension account such as pension savings or IRP. You can receive an additional tax deduction on 10% of the amount transferred from your ISA. For example, if you move 60 million won from your ISA to a pension savings or IRP account, you can receive a tax deduction of 13.2% or 16.5% on 6 million won, depending on your income. However, be aware of restrictions on early withdrawals from pension accounts and the possibility of miscellaneous income tax if you receive funds outside of pension payments.

If your net profit over three years is around 2 million won, it is better to close the account. On the other hand, if your ISA has incurred larger losses, it may be beneficial to delay closing the account until you reach the tax-exempt limit.

However, if you have been subject to comprehensive financial income taxation in the past three years, think carefully. If your annual interest and dividend income exceeded 20 million won at any time, you cannot open a new ISA account. Because of these advantages, opening an ISA account is considered an essential step in asset management for young professionals. At year-end, securities firms aggressively market ISA accounts, so comparing additional benefits before opening an account can be advantageous.

If you have fully contributed 6 million won to pension savings, 3 million won to IRP, and 20 million won to ISA in a year, you will be able to prepare for retirement, invest, and receive tax refunds all at once. If you have extra funds, you can also make an additional annual contribution of 9 million won to your pension savings and IRP accounts.

The annual contribution limit for pension accounts (pension savings and IRP) is 18 million won. Since the tax deduction limit is 9 million won, it is advisable to make your initial contributions, invest through your ISA, and, if you have additional funds, make extra contributions to your pension accounts.