Starting this year, as I have been residing in the United States, I became curious about the U.S. pension system and decided to do a bit of research. While there are many types of pension plans in the United States, and I’m by no means a tax expert, I thought I’d write a little on this topic in case it might be helpful. As mentioned earlier, there are various types, and the United States, with its individual business owner retirement plans, healthcare for one’s retirement years, child education funds, and more, has such a wide range of pension options that it’s challenging to cover everything. Instead, in this blog, I will focus on the pension systems and retirement preparation concepts in South Korea and the United States, primarily targeting employees (profit-based companies).

In conclusion, there isn’t a 100% exact match between South Korean and U.S. pension accounts or systems. Even though they may seem somewhat similar, there are slight differences that make a one-to-one comparison challenging. Since direct comparisons are difficult, I’ve categorized them to provide a somewhat similar structure, as outlined below.



Type	Korea	US	Remark
National/Federal Fund	National Pension Fund	Social Security Retirement	First Layer
Individual / Company Pension	Retirement Pension (DC/DB)	401(k)	Second Layer
Individual Pension	Pension Saving Fund	Traditional IRA	Third Layer
	IRP
	–	Roth IRA



The easiest to understand would be the National/Federal Pensions. As of the time of writing, in South Korea, employees and employers each contribute 4.5% of the employee’s salary, totaling 9.0% collected. In the United States, 6.2% of the salary is contributed, with employees and employers each paying half, totaling 12.4%. Both require a qualification period of over 10 years to receive pension benefits. In South Korea, they provide a statement detailing the national pension contributions and the expected pension amount upon retirement, but honestly, whether you’ll receive it is uncertain! In the United States, the pension amount varies depending on the retirement age. As of 2023, the full retirement age is 67, with a monthly benefit of $3,627. At age 62, it’s $2,572 per month, and at age 70, it’s $4,555 per month.

Secondly, we can categorize pensions at the individual/company level. The retirement pension we are familiar with can be divided into DB/DC types, where an equivalent of one month’s salary is accrued per year. In the United States, there’s a somewhat similar pension supported at the corporate level called the 401(k) program. The 401(k) program is offered by for-profit companies, and a similar program targeting employees working for non-profit organizations or government agencies is known as the 403(b) program. This concept involves employees contributing a certain percentage of their salary to the 401(k) program, and the company typically matches a portion or the entire contribution, which is known as “matching.” For instance, if a company matches a 4% contribution from an employee earning a $100,000 salary, the employee contributes $4,000, and the company contributes an equal $4,000, for a total of $8,000 invested annually. Since the company supports this program, it’s essentially a guaranteed 100% return, making it quite an attractive option. The key features are as follows:

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401(k)

• Employee/employer annual maximum contribution limit of $22,500 or $30,000 (for those aged 50 and older).
• Employee/employer combined maximum contribution limit of $61,000 or $67,500 (for those aged 50 and older).
• Tax-free until withdrawal (tax-deferred growth possible).

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While 401(k) is indeed a great program, it might be a bit insufficient for comfortable retirement savings. To complement this aspect, additional personal retirement investments are often necessary. In Korea, you can invest through pension savings funds and IRP accounts, while in the United States, you have the option of investing through Traditional IRA or Roth IRA. Here are the key features of Traditional IRA and Roth IRA.

Traditional IRA

• Tax-deductible: Contributions are tax-deductible.
• Tax Treatment: Earnings are tax-deferred, and they are taxed upon withdrawal.
• Required Minimum Distributions (RMDs): Mandatory minimum distribution must begin at age 72.
• Early Withdrawals: If withdrawn before age 59.5, a 10% penalty applies.
• No Income Limits: There are no income limits for contributions.
• Contribution Limits: As of 2023, the limit is $6,500 ($7,500 for those aged 50 and older).

Roth IRA

• Non Tax-deductible: Contributions are not tax-deductible.
• Tax Treatment: Earnings are tax-free.
• No Required Minimum Distributions: There are no mandatory minimum distributions.
• Early Withdrawals: Contributions can be withdrawn penalty-free.
• Income Limits: There are income limits for contributions – $153,000 per year for singles and $228,000 per year for married couples.
• Contribution Limits: As of 2023, the limit is $6,500 ($7,500 for those aged 50 and older).

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In essence, the concept is to receive tax benefits upfront with a Traditional IRA and pay taxes on earnings later, whereas with a Roth IRA, you don’t receive immediate tax benefits, but your earnings are tax-free in the future. If you have a short investment horizon, taking advantage of the tax benefits with a Traditional IRA might be the better choice. However, for long-term investments, a Roth IRA, where you don’t pay taxes on earnings, is likely the superior option. If it were up to me, I would choose a Roth IRA without a doubt.

However, there is one issue. There are income limitations for those eligible to operate a Roth IRA. Fortunately, there is a workaround called the Backdoor Roth IRA. This method involves contributing to a Traditional IRA, which has no income restrictions, and then immediately transferring the funds to a Roth IRA. There have been discussions in the United States about potentially making this method illegal, but as of now, it is a widely known and used strategy. In Korea, pension savings funds and IRPs are somewhat similar to Traditional IRAs. They offer some tax deductions upfront but tax the earnings later. However, in Korea, even earnings beyond a certain limit are subject to taxation, unlike in the United States where they are not. It would be nice if Korea followed the US model and didn’t tax the earnings beyond the tax deduction limit!