Smart Pension Investing: How to Save on Taxes with an ISA Account and Transfer It to a Pension Account

Build Your Retirement Fund with More Benefits Through an ISA Account

Retirement... 👴🏻 You could call it homework for everyone living in Korea. Under the National Pension depletion scenarios, the pension fund will eventually be used up, and the pension from your company alone isn't enough, so more and more people are turning to personal pensions.

Did you know that preparing for retirement with an ISA account can be even more efficient? In this post, we'll look at the benefits of an ISA account and how to transfer it to a pension account.

What Is an ISA Account? 🤔

An ISA account is an Individual Savings Account (개인종합자산관리계좌) offered to Korean residents aged 19 or older.

You can open one regardless of your income, and you can invest in a wide range of financial products such as deposits, ETFs, funds, REITs, and domestic stocks. However, anyone who has been subject to comprehensive financial income taxation at least once in the previous 3 years cannot open an ISA.

When you open an ISA account, you have to set a subscription period. The minimum mandatory period is 3 years, and after that you can either close or extend the account. Even before the mandatory period ends, you can withdraw funds as long as the amount doesn't exceed the principal you've paid in.

The ISA contribution limit is up to KRW 20 million per year, with a maximum of KRW 100 million in total. The annual contribution limit can also be carried over. In other words, if you didn't put in any money in year 1, you can contribute up to KRW 40 million in year 2.

What Are the Benefits of an ISA Account? 🔍

So what benefits does an ISA account offer? An ISA account provides the following tax exemption and tax credit benefits.

Tax exemption: Interest and dividend income are tax-exempt (limit: KRW 4 million for the low-income type, KRW 2 million for the general type). Any amount exceeding the tax-exempt limit benefits from separate taxation at a 9.9% rate.
ISA tax credit: You can receive a tax credit for 10% of the matured funds (up to KRW 3 million).

On top of these tax benefits, an ISA account has the advantage that you can transfer the funds to a pension account when it matures. Doing this lets you build a larger retirement fund more quickly.

Making 100% Use of Your Pension Savings Account 🌟

A pension savings account is a really great account for investing in dividend ETFs. Regular financial accounts charge 15.4% income tax on interest and dividends, but in a pension account there is no tax until you start withdrawing and using the money. And if you receive those funds as a pension after age 55, you only pay a pension income tax of about 3.3–5.5%.

However, the biggest drawback of a pension savings account is that you can only contribute up to KRW 18 million per year. A pension savings account offers big tax savings, but even if you want to put in more money, you can't because of the limit.

For this reason, many people want to transfer their matured ISA funds into a pension savings account. If you move the funds into a pension account after your ISA matures, you can put an amount well over the annual KRW 18 million limit (up to KRW 100 million every 5 years) into your pension account and use it for things like dividend ETF investing. You can also receive a 10% tax credit of up to KRW 3 million when you transfer the matured ISA amount into a pension savings account.

5 Steps to Transfer Your ISA to a Pension Account at Maturity 📝

As we saw earlier, an ISA account has a maturity. The mandatory subscription period is at least 3 years. After the mandatory period, you can close the account and transfer the funds to a pension savings account.

If you've contributed the full limit for 3 years, you may have KRW 60 million, or even the maximum of KRW 100 million, in your ISA account. Now let's look at how to move all of it into a pension savings account.

Here are the 5 steps for applying for a pension conversion to move a matured ISA account into a pension account.

Call or visit your bank or securities firm to close an ISA account that is more than 3 years old.
Decide how much (all or part) you will convert into a pension savings or IRP product.
Apply for the pension conversion.
Deposit the requested amount into your own account as instructed for the pension account conversion. Make sure you deposit exactly the same amount as you applied for.
Once it's confirmed that the deposited amount matches the pension conversion amount, the pension conversion is complete.

As you can see, the ISA pension conversion process takes 5 steps in total. Usually, before your ISA account matures, your bank or securities firm will send you a text message about maturity and extension options. If you haven't received one, you can visit or call your bank or securities firm any time from 3 months before maturity up to the maturity date.

After that, just follow the steps above to transfer that ISA account into a pension account. However, the steps above must be completed within 60 days of the ISA account's maturity date.

Frequently Asked Questions About ISA Pension Conversion 📖

Below are answers to frequently asked questions about pension conversion and ISA accounts.

Q1. Can I re-open an ISA on the same day I close it?
- Yes. As long as you meet the eligibility requirements, you can terminate the contract and close the account, then sign up again right away on the same day.
Q2. Can someone subject to comprehensive financial income taxation in the previous 3 years still convert and contribute to a pension account?
- Yes. ISA pension conversion is possible regardless of whether you are subject to comprehensive financial income taxation.
- However, note that if you were subject to comprehensive financial income taxation at least once in the previous 3 tax periods, you cannot open a new ISA.
Q3. Can I convert to a pension once 3 years have passed, regardless of the maturity I set when I signed up?
- Yes. Regardless of the maturity set at sign-up, you can convert to a pension once 3 years have passed since you opened the account.
Q4. Do I have to deposit the ISA closing amount directly into the account I'm converting to?
- No. You can receive the ISA closing funds in another account and then, within 60 days, deposit the amount you applied to convert into the pension account you're converting to.
- You can deposit it all at once or split it into several deposits.
Q5. Can I apply for a pension conversion even after my ISA has matured?
- Yes, you can. However, the conversion into the pension account and confirmation of the deposit must be completed within 60 days of the maturity date, not the application date.

How to Grow Your ISA Funds in a Pension Account 💸

Now you've moved all your ISA funds into a pension savings account. So how can you grow that money in the pension account? The key is to make the most of the fact that a pension savings account charges no separate tax until you start receiving your pension.

The most common approach is to invest in an ETF such as SOL US Dividend Dow Jones and reinvest the dividends it pays out, in other words, reinvesting in dividend growth stocks. This way, you can reinvest your dividends in full without paying any tax and maximize the effect of compounding.

Final Summary 💛

An ISA account is a financial account that offers tax credits and tax exemption benefits. The mandatory subscription period is 3 years, and the maximum contribution limit is KRW 100 million. If you're building a personal pension, you can convert those funds into a pension account when your ISA matures, saving on taxes and enjoying compounding in your pension account.

Pension savings are one of the best ways to prepare for retirement. But they have drawbacks too. First, there's the annual contribution limit of KRW 18 million. On top of that, if a large amount is locked up for a long time, it can be hard to access when you need it, and if you cancel early you may have to pay back the tax benefits. Also, you can't receive your pension all at once; you have to receive it in installments.

So if you plan to invest in an ISA account and a pension account, please remember not to pour money in just because of a few benefits, but to first make an asset allocation plan that fits your own goals.

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