Pension Account Priorities in Korea – When investing in personal pension, the order of accounts can vary based on individual circumstances and preferences. According to pension-related literature and rules of thumb, the following order of investment is generally considered efficient:

Pension Savings Fund 6M KRW > IRP (Individual Retirement Pension) 3M KRW > Pension Savings Fund 9M KRW > ISA Account (Intermediary) > Direct Investment in the U.S. (International Stocks)

As commonly known, the reason for prioritizing the Pension Savings Fund is that it allows 100% investment in non-safe assets, enabling the maximum tax deduction of 6M KRW. Subsequently afterwards, investing in IRP allows a tax deduction of 13.2% or 15.4% on the total annual contribution of 9M KRW, depending on the individual’s income level. The remaining 9M KRW in the Pension Savings Fund is invested in non-safe assets, similar to the rationale for the initial investment. Finally, investments are made in the order of ISA account, followed by international/direct U.S. investment.

Why are ISA accounts and international/direct U.S. investments given lower priority?

Let’s look at the advantages and considerations of each account:

ISA Account

(+) Tax benefits of 2-4M KRW
(+) After-tax benefits, profits are subject to a separate tax of 9.9%
(+) Deferring taxation on realized gains and dividend income within the account
(+) Taxation considering both gains and losses within the account
(-) Obligatory holding for 3 years, limit of 100M KRW (maximum annual 20M KRW)

International/Direct U.S. Investment Account

(+) Tax benefits of 2.5 million won per year
(+) After-tax benefits, profits are subject to a separate 22.0% capital gains tax
(+) Taxation considering both gains and losses within the account
(-) Inability to defer taxation

While Pension Savings Fund and IRP accounts incur pension income tax or comprehensive income tax upon withdrawal, ISA accounts and international/direct investment accounts apply separate taxation on withdrawal, making a decision based on the annual withdrawal amount for each investment account.

Before understanding these points, I have to say retirement planning is crucial. Reflecting on one’s retirement plans becomes essential once you start pension investments. Retirement internet community where individuals share experiences and thoughts about retirement, offer insights into various categories, including post-retirement jobs, returning to farming, professional pursuits, certifications, and investment stories.

Conclusion – Pension Account Priorities in Korea

Returning to the investment narrative, detailed retirement plans and lifestyle considerations after retirement need to be explored. Contemplating the amount needed after retirement for hobbies, regular exercise, or other interests can help estimate the required funds. This, in turn, facilitates a backward calculation to determine how much to invest in personal pension each month or year, considering the current age. Subsequently, a conclusion can be drawn on the most advantageous method and sequence of investments.

Curious about simulation results? Stay tuned for the next post, where we’ll run simulations under certain conditions. For those interested, a past post on “U.S. Direct Investment vs. Domestic Listed Overseas ETFs, General Account vs. Pension Savings Account Investment, and Comprehensive Income Tax” may provide some reference. Pension Account Priorities in Korea

Direct Investment in the US vs Domestic-listed Overseas ETF – Regular Account vs Pension Savings Account Investment and Comprehensive Income Tax in Korea