My ISA account finally hit the 3-year maturity mark, and I was getting ready to transfer it into my retirement savings account to claim a tax deduction. But suddenly, a thought crossed my mind: “Wait… wouldn’t this affect my U.S. tax return?” So I decided to double-check.
💡 Conclusion
If you live in the U.S., all capital gains generated inside Korean tax-advantaged accounts (ISA, retirement pension accounts, etc.) are still taxable in the U.S., even if they are tax-free or tax-deferred in Korea.
📌 Situation Summary
I file taxes in both Korea and the U.S.
My ISA account reached the 3-year maturity, and I considered transferring it to a retirement savings account to get the Korean tax deduction.
But when transferring, all assets inside the ISA must be sold (converted to cash).
I needed to check whether this capital gain would be taxable under U.S. tax law.
After digging through Google and Naver without finding a clear answer, I eventually asked GPT and requested official sources (IRS Code, Regulations, Publications) to cross-verify. Here’s the summary.
🇰🇷 Korean Tax Law vs. 🇺🇸 U.S. Tax Law
Korea treats ISA and retirement accounts as tax-free or tax-advantage. But the U.S., following its worldwide taxation rules, only recognizes accounts listed in U.S. law. If the account structure isn’t recognized, any gains are simply taxable.
1. ISA is not recognized as a tax-favored account under U.S. law
Although ISA gains are tax-advantaged (or tax-free) in Korea, the U.S. views it as just a regular brokerage account. So interest, dividends, and capital gains generated inside an ISA are taxable when realized, regardless of Korean treatment.
2. Selling within ISA at maturity is a taxable event under U.S. law
When ISA assets are sold at maturity, the U.S. considers that a realization of capital gains. If a gain exists, it must be reported on Form 1040 / Schedule D for that year.
Korea may treat this as a simple transfer with no tax, but the U.S. treats it as realized income.
3. Transferring to a retirement savings account is not a rollover
Because Korean retirement accounts are not recognized as Qualified Retirement Accounts under U.S. tax law, the transfer cannot be treated as a tax-free rollover.
The cash that enters the new Korean retirement account is simply considered a new investment. Any prior gains must already be recognized as taxable income.
Summary Table
ISA Treatment
Item
Korea
U.S.
Selling within ISA
Tax-free (up to 2–4M KRW)
Fully taxable (capital gain realization)
Transfer to retirement account
Tax-deferred
Treated as new investment (sale still taxable)
Tax deduction benefits
O
X
U.S. Tax-Favored Accounts (Legal Basis)
U.S. tax law (IRC) recognizes only a specific list of tax-advantaged accounts:
Account
Legal Basis
Summary
Traditional IRA
IRC §408(a)
Deductible contributions, taxable withdrawals
Roth IRA
IRC §408A
Tax-free withdrawals
401(k) / 403(b)
IRC §401(k), §403(b)
Employer-sponsored retirement plans
HSA
IRC §223
Tax-free contributions, growth, withdrawals for medical use
Only rollovers between qualified accounts are tax-free.
Requirement
Description
Qualified-to-Qualified transfer
Both accounts must be listed under §401, §403, §408, etc.
60-day rule
Funds must be redeposited within 60 days
1-year rule
IRA-to-IRA rollover permitted once per year
Not permitted
Transfers from general accounts or foreign accounts
Final Comparison
Category
Korean ISA / Retirement
U.S. Qualified Plan
Legal basis
Korean Income Tax Act §91
IRC §401, §403, §408
Tax deferral recognized
O
X
Rollover recognized
O (ISA→retirement)
X
U.S. taxation
Taxable on sale
Tax-free if requirements met
At this point, another question naturally came up: Is the U.S. system essentially a “positive list”? Meaning: Only the accounts explicitly listed receive tax benefits.
GPT confirmed that this is correct.
U.S. Tax Principle: Taxable by Default
U.S. tax law operates on a “tax unless excluded” basis:
“All income is taxable unless expressly excluded by law.” — IRC §61(a)
So only accounts explicitly listed in the law qualify for tax-free or tax-deferred treatment. Everything else — including Korean ISA and retirement accounts — is treated as a regular taxable account.
Account
Code
Benefit
Status
401(k)
IRC §401(k)
Tax-deferred
✔ Recognized
IRA
IRC §408
Deduction/deferral
✔ Recognized
Roth IRA
IRC §408A
Tax-free withdrawal
✔ Recognized
HSA
IRC §223
Full tax-free status
✔ Recognized
Korean ISA / Pension
—
None
✘ Not recognized
My Case
At the time of transfer:
ISA contributions: 30M KRW
Gains inside ISA: 15M KRW
Korean tax benefit: ~3M KRW
U.S. long-term capital gains tax (15%): ~2.25M KRW
Even though the Korean tax benefit is larger, the paperwork and complexity make the transfer unattractive. Realistically, I’ll just maintain the ISA while living in the U.S.
Before moving abroad, I had already liquidated all my regular Korean brokerage holdings and shifted everything into long-term investments. But now that even Korean tax-deferred accounts are taxable under U.S. law, this actually motivates me to stick with long-term investing even more… 😭
I have sold all of my existing KODEX TDF2050 Active in IRP safe assets and switched to TIGER TDF2045.
Comparison of U.S. Market Investment Proportions in Major TDF ETFs (as of March 2025) – TIGER TDF2045 → 79.0% of the total portfolio is invested in the U.S. market. – KODEX TDF2050 Active → 49.5% of the total portfolio is invested in the U.S. market. – ACE TDF2050 Active → 57.14% of the total portfolio is invested in the U.S. market.
Background of the Review
As I mentioned in a previous post, I had been investing in KODEX TDF2050 Active as my IRP safe asset. For your information, the table below shows my portfolio of personal pension accounts such as retirement savings and ISA accounts.
It has been nearly two years since I invested in KODEX, but recently, I came across an article announcing the launch of TIGER TDF2045. Curious about its composition, I reviewed the portfolio and immediately decided to switch. Let’s take a detailed look at why.
Comparison of Major TDF ETFs
Since I still have a long time until retirement, it is beneficial to choose a safe asset with a higher proportion of stocks. The number in the ETF name indicates the target retirement year, and the further the retirement date, the higher the stock allocation. Fund managers periodically rebalance stock and safe asset (bonds, etc.) allocations, increasing the proportion of safe assets as the retirement date approaches.
I searched for TDF ETFs currently available in the market and found a total of 16 options. To narrow down my choices, I focused on ETFs with the latest target retirement dates while also considering liquidity and sustainability. There needs to be a certain level of trading volume and transaction value, so I ultimately selected three ETFs for review.
ETF
Asset Management by
Commision Rate
Trading Volume (as of 3/26)
Trading Amount (Uni: thousands KRW)(as of 3/26)
KODEX TDF2050 Active
Samsung
0.30%
148,999
2,161
ACE TDF2050 Active
Korea
0.35%
92,830
942
TIGER TDF2045
Mirae Asset
0.19%
895,795
9,060
TIGER TDF2045 has high trading volume, likely due to aggressive marketing after its launch. It will take a few months to get a clear comparison of normal trading volume and transaction values, but this ETF seems positioned to be one of the “Big 3” TDF ETFs.
Stock funds with more than 40% equity allocation are classified as risky assets in retirement accounts. However, “Qualified TDFs” with stock allocations below 80% are considered safe assets, allowing full investment of retirement pension funds. Since TDFs gradually increase their safe asset allocations as they approach retirement, this classification is recognized. This explains why TIGER TDF2045 has a 79% stock allocation. (Source : https://news.einfomax.co.kr/news/articleView.html?idxno=4340686)
For the first 15 years, it decreases the stock allocation by 1% from 79% annually while increasing the bond allocation by 1% from 21%.
In the last 5 years before retirement (2045), it adjusts the allocation by 5% annually.
By retirement, the stock-to-bond ratio will be 39% to 61%.
On average, over the next 20 years, 66% of the fund is expected to be invested in the U.S. S&P 500 and 34% in bonds. For a safe asset, this is a relatively high stock allocation, particularly with a concentrated focus on the U.S. market.
A closer look at its composition reveals that its bond holdings consist of domestic government and monetary stabilization bonds, while its equity holdings are structured to mirror the S&P 500.
I decided to sell my entire investment in KODEX TDF2050 Active and switch to TIGER TDF2045. The primary reasons are TIGER has higher average stock allocation and also exclusive focus on the U.S. market rather than global diversification.
KODEX TDF2050 Active
I initially chose KODEX TDF2050 Active as a safe asset two years ago, and at that time, a significant portion of its portfolio was allocated to the S&P 500.
Past composition
However, upon reviewing its latest portfolio composition, I noticed some changes. While the overall stock/bond ratio remains similar, the fund has shifted from a U.S.-centric portfolio to a more globally diversified one. Even though a majority of its investments are still in the U.S., Samsung Asset Management appears to be focusing on diversification to reduce volatility.
To analyze this shift further, I examined the specific global ETFs within its holdings:
VT
SPGM
ACWI
Since they were investing mainly in top companies based on global market capitalization, I wanted to check which market they were investing in rather than individual stocks. This is because I was curious about the proportion of investments in the U.S. market.
VT
VT (as of February 2025) → 63.9% invested in the U.S.
Top proportion of obvious investments
SPGM
SPGM (as of March 2025) → 63.28% invested in the U.S.
Top proportion of obvious investments
ACWI
ACWI (as of March 2025) → 64.29% invested in the U.S.
Top proportion of obvious investments
By aggregating the allocations of these ETFs, the KODEX TDF2050 Active’s estimated U.S. market investment proportion is around 49.5%, significantly lower than TIGER TDF2045’s 79%. Since I strongly favor U.S. market investments, I decided to liquidate my holdings in KODEX.
ACE TDF2050 Active
NO
Investment
%
1
SPDR Portfolio S&P 500 Growth ETF
18.42
2
ACE S&P500
15.96
3
iShares Gold Trust Micro
13.48
4
Vanguard Value ETF
11.7
5
ACE Bond (AA- or above)KIS Active
10.81
6
ACE Gov Bond 10y
8.76
7
Vanguard FTSE Emerging Markets ETF
4.57
8
Vanguard Growth ETF
4.44
9
SPDR S&P500 ETF
3.69
10
Schwab U.S. Large-Cap Value ETF
2.93
11
KODEX Bond (AA- or above ) Active
2.68
12
Vanguard FTSE Developed Markets ETF
2.56
ACE TDF2050 Active’s portfolio (as of March 2025) includes multiple ETFs with U.S. market exposure as bolded. Summing these allocations, its U.S. market investment proportion is 57.14%, slightly higher than KODEX but still lower than TIGER.
Final Decision
Among the available options, TIGER TDF2045 currently has the highest U.S. market allocation. Even over the next 20 years, it is expected to maintain the highest proportion of U.S. investments. Given this, I have sold my previous safe assets and reinvested in TIGER TDF2045.
If TDF 2055, 2060, or 2065 funds are introduced in the future, I may reconsider my allocation. At that time, I will either sell and switch again or keep my existing investments while adding new funds to my portfolio.
Moving forward, I plan to manage my portfolio based on this revised allocation strategy.
Severance Pay & Performance Bonuses as Pensions in Korea. I don’t currently have to deal with this, but I’m writing this post to document and prepare for when the time comes.
Severance Pay (DB Plan)
The tax treatment of severance pay depends on how it’s received. This applies only to Defined Benefit (DB) plans and not to Defined Contribution (DC) plans. In Korea, it’s required to receive severance pay through IRP account.
Severance Pay (DB) → Received in an IRP Account → Lump Sum or Pension Withdrawal (Starting at Age 55 for Pension Withdrawal)
If you take a lump sum, you’ll pay income tax based on the severance tax rate. The tax amount depends on years of service and taxable income brackets.
For example, if you worked for 20 years and received 100 million KRW in severance pay, you would owe approximately 11.2 million KRW in taxes—an effective tax rate of 11.2%.
(Case Study provided by National Tax Service Korea)
• You joined A Corp. on January 1, 2004, and retired on December 31, 2023.| • Years of service: 20 years • Final severance pay: 100 million KRW
What if you receive severance as a pension?
The biggest advantage of taking severance as a pension is tax deferral. Instead of paying taxes upfront, you can invest the amount and earn additional returns.
Additionally, tax reductions apply based on the number of years you receive pension payments:
• Years 1–10: 30% tax reduction of severance tax • Years 11+: 40% tax reduction of severance tax
The most efficient strategy would be to leave severance pay in an IRP account until age 55 and start withdrawing at age 65, maximizing the 40% tax reduction.
Investment returns on severance funds are taxed as pension income if annual withdrawals are below 15 million KRW (tax rate: 3.3–5.5% depending on your age). If withdrawals exceed this, they are taxed as general income.
However, if severance pay is needed for living expenses now, taking a lump sum may be better than waiting for tax reductions. Inflation erodes purchasing power, and riskier investments may not be an option for those relying on severance for daily needs.
For those who change jobs frequently, it may be smarter to leave severance funds in IRP accounts rather than cashing out each time.
What happens if you receive severance as a pension?
Let’s assume:
• You joined Company A at age 25, worked 20 years, and changed jobs at age 45. • Received 100 million KRW in severance, invested in the S&P 500 for 10 years. • Started pension withdrawals at age 55.
Using Portfolio Visualizer:
• 10-year CAGR (50th percentile performance): 10.92% • Final value after 10 years: ~280 million KRW (100M severance + 180M investment returns)
If withdrawals are 10M–15M KRW per year, taxes will be significantly lower than a lump sum withdrawal. This underscores the importance of long-term investment and strategic tax planning.
KRW per year, taxes will be significantly lower than a lump sum withdrawal. This underscores the importance of long-term investment and strategic tax planning.
Type
Withdrawal Amount
Tax
Remark
Year 1 (age 55)
10M KRW
10M KRW *11.2% * 70% (30% Deduction)
From severance pay resources first
Year 2 ~ 7
15M KRW
15M KRW *11.2% * 70% (30% Deduction)
Exhaustion of severance pay
Year 8 ~15
15M KRW
15M KRW * 5.5%
From operating profit resources
Year 16 ~ 19
15M KRW
15M KRW* 4.4%
Total
280M KRW
20M KRW
7.3%
Performance Bonuses: Lump Sum vs. Pension
The same tax advantages apply to performance bonuses if they are received as pension rather than earned income.
For employees in high-paying industries, accumulated performance bonuses could exceed severance pay in value over time. For example, this year employees at SK Hynix will receive massive performance bonuses ranging from tens of millions to hundreds of millions of KRW.
If received as salary, these bonuses are taxed at an effective earned income tax rate of 20–40%. Instead, investing them as pension could result in huge tax savings and long-term investment growth.
However, this requires company-level policy changes, such as:
1. The company adopting a DC plan. 2. The company allowing performance bonuses to be contributed to DC accounts.
Unfortunately, my company only offers a DB plan, so this isn’t an option for me. But for those working at companies with DC plans, it’s worth serious consideration.
Managing Pension Accounts
I already have an IRP account for personal contributions, but severance pay must be received in a separate IRP account. This raises a question:
Can IRP accounts be merged, or do I need two separate accounts?
Two options:
1. Combine severance and personal savings into one IRP account (choose the “combined account” option at securities firms). 2. Keep two separate IRP accounts—one for severance, one for personal savings.
After some thought, I’d likely keep two accounts, for the following reasons:
• If I ever need to withdraw severance, I can close only the severance IRP account. • After age 55, I can start pension withdrawals from one account while keeping the other for tax deductions.
After age 55, it may also make sense to open an additional pension savings fund account for maximizing tax deductions. With multiple accounts, I could use larger accounts for pension withdrawals and smaller accounts for tax deductions.
While writing this post, I couldn’t help but think about what it would have been like if our parents had done this for us. But, oh well, there’s nothing we can do about it now. I’ll write this post with the intention of doing it for my own children in the future.
In families where there is no substantial business or inherited wealth passed down through generations (= typical households), the most effective way to pass on wealth might be to create an investment account from birth and consistently invest in long-term assets. The investment amount may vary depending on individual circumstances, but it seems that the gift tax limit for children, which does not burden them too much, might be appropriate.
The table below shows the current minor child gift limit with no tax in Korea and the monthly investment amount available.
Age
Limit (KRW)
Monthly Investment (KRW)
0-9y
20M
167K
10-19y
20M
167K
20y-29y
50M
417K
30y~
50M
–
Total
140M
There’s no need to think twice about where to invest; it’s a 100% investment in the S&P 500. The investment account can be either a pension savings fund account or a regular account, each with its pros and cons. Investing through a pension savings fund may defer taxation, but there may be many restrictions on withdrawal, whereas with a regular account, withdrawal and usage are more flexible, but capital gains and dividends will both be taxed. Whether to give children freedom or force them to prepare for retirement is up to the parents, haha.
Let’s simulate giving an investment only during childhood (investment principal 40 million won) and see how it goes. As always, for simulations, I use the https://www.portfoliovisualizer.com/ tool.
The investment conditions are as follows:
Starting Point of Investment: 0 years old
Portfolio Type: Portfolio Assets SPY (S&P 500)
Cashflow: Fixed amount contributed per period
Initial Amount: Although it should be more than 0, I entered 1
Contribution Amount: 166,667 won
Contribution Frequency: Monthly
Simulation Period in Years: 20 years
Tax Treatment: Pre-tax
Simulation Model: Historical Returns
Use Full History: Yes
Inflation Model: Historical Inflation
Rebalancing: None
The investment results are shown in three cases. The most realistic result seems to be 50%, with a pre-tax 94.1 million won in hand when the child turns 20, adjusted for inflation. It seems like enough money to start whatever he/she wants, whether it’s going to college, starting a business, or traveling.
Performance
Investment Period
Monthly Investment
Total Principle
CAGR
Appraised Value (KRW)
Nominal
Inflation Adjusted
Nominal
Inflation Adjusted
Top 25%
20 years
167K KRW
40M KRW
13.1%
10.3%
221M
133M
50%
10.2%
7.5%
155M
94M
Bottom 25%
7.2%
4.6%
107M
65M
If the child, even after becoming an adult, continues to leave the investment untouched, the results are as follows (based on 50%).
Age
Investment Period
Monthly Investment
Total Principle
CAGR
Appraised Value (KRW)
Nominal
Inflation Adjusted
Nominal
Inflation Adjusted
0-19y
20
166K KRW
40M
10.2%
7.5%
155M
94M
20-29y
10
–
–
409M
193M
30-39y
1.1B
399M
40-49y
2.8B
823M
50-59y
7.5B
1.7B
This kid seems to have all their retirement plans sorted without saving a penny from their job. The compound effect turns an initial investment of 40 million won into the miraculous sum of 7.5 billion won after 60 years. Yet another day to regret and be angry about not starting pension investments early.
I’m now entering my 6th year of investing in personal pensions using pension accounts (Pension Savings Fund, IRP, ISA accounts). Through many trials and errors, I have established a long-term investment system and developed my own mindset as a long-term investor. In this post, I want to share some thoughts on the factors to be cautious of while investing long-term and how I came to establish the mindset necessary for it. Many of the ideas in this post closely match the contents of the book “The Simple Path to Wealth” by JL Collins. If you’re interested, you can read the book, or if not, just reading the summaries on Reddit should be enough. I was amazed at how much it all resonated with me.
1. You need to let go of the thought and desire to outperform the market.
First, let me quote one of the summaries of “The Simple Path to Wealth” found on Reddit. Many people don’t like index investing for the following reasons:
Many people still don’t like to index.. why?
o It is difficult for smart people to accept that they can’t outperform the index. o It means you are accepting the market “average” return. o The financial media is full of stories of people who outperformed the index for a few years. o Over periods of 15-30 years though, 82-99% of the indexes will win. o People underestimate the fees they pay to managers. o People want exciting, quick results and bragging rights. Buying an index and holding long term isn’t exciting. Get your excitement someplace else. o There is a huge business selling advice and doing trades to people who can be persuaded to believe they can outperform.
When we think about investing (=how I used to think…), it’s typical to expect double-digit annual returns without having a well-done company & market analysis. However, such returns never happen, even if the company & market analysis is assumed to be perfect. Even investments by smart institutions mostly underperform compared to index investing in the long run. Warren Buffet also mentioned that individuals don’t have the ability to pick individual company stocks, and he even said to his wife that he would leave her a portfolio consisting of 90% S&P 500 and 10% bonds. Even though investing steadily in the market for a long time has been proven to be a successful investment strategy, why is it difficult to accept that you can’t outperform the market? Where does the desire to outperform the market come from?
1) FOMO (Fear of Missing Out)
I think the biggest reason is the fear of missing out. When we start evaluating others’ standards rather than our own and hear many stories from our surroundings or the media about who earned how much and whose investments were successful, it’s natural to feel anxious. Then, unknowingly, we start to reach for risky investments, and when we do, accepting the market return becomes extremely difficult. Investing activities are separated into the field of management/economics, but in reality, the more I think about it, the more closely related it seems to be to humanities/philosophy/psychology.
2) Desire to become wealthy quickly
Similar to the above, I think it’s difficult to accept the market return because of the desire to become wealthy immediately, rather than after retirement. Because accepting the market return means giving up on becoming wealthy immediately. We weren’t born into a wealthy family, and we can’t avoid spending physical time accumulating wealth. We need to accumulate seed money through labor and accumulate wealth through steady investment activities and preserve the accumulated wealth well. Although the timeframe may vary depending on individual goals, for an average office worker, it will take about 15-30 years. It’s not easy to have the patience to postpone current pleasures and satisfactions for 15-30 years.
In conclusion, I think we need to have the mindset that we need to accumulate wealth slowly by acknowledging the market return. It took me a long time to admit this and make progress. It’s not easy to give up the desire to buy a nice house and car, and spend freely, and instead invest long-term for retirement. And in recent years, seeing people easily make and spend money through coin trading, I have also had doubts about whether what I am doing is really right. Nevertheless, I think I had to believe that what I was doing was right and continue to execute it steadily.
Investment books by gurus were very helpful in giving me peace of mind. By regularly reading books by Buffet, Graham, Lynch, Costolani, Bogle, Siegel, Bernstein, etc., I was able to suppress the desires and impulses that were deeply ingrained in my mind. If you do it for a long time, you’ll stop looking at your balance so often and become so indifferent to the market that your mind becomes comfortable. Just as I thought that investment activities are closely related to humanities/philosophy/psychology, listening to and reading stories from gurus in our society also helps me to feel a lot and find psychological stability. Moreover, devoting time to self-improvement is very helpful in eliminating investment distractions. Warren Buffet said something like this at the Berkshire Hathaway shareholders’ meeting (if you search YouTube, you’ll find interviews or conversations where he says the same thing over and over again).
“The best investment is an investment in yourself, and what you invest in yourself is not lost or gone. The biggest asset among assets is yourself. It is not affected by inflation, and no one can take away your abilities. So be good at something.”
Isn’t that so true? Although he mostly talked about career-related aspects, if you invest time in self-improvement in various aspects, you can upgrade your assets quantitatively or qualitatively. I also invest about 3-10% of my income to learn new things, study, and develop hobbies, which helps me to block out other thoughts.
2. You must recognize the fact that even experts can be wrong.
I worked in the company’s planning team for about a year and a half in the past. One of my roles was investment operations, and I was responsible for effectively managing the company’s retained earnings to generate non-operating income and reinvesting them in the core business to continuously secure competitiveness within the industry. The company, which had been in business for about 40 years, had accumulated retained earnings of around $400-500m since the 1980s, and I was in charge of managing these funds. Investments were made in various assets such as deposits, bonds, equity-type assets, unlisted stocks, and private equity funds, and the annual target rate of return was set, with performance evaluated monthly.
In July 2020, I was transferred to this team. I had checked the investment portfolio and learned that most of the assets were invested in deposit and bond-type funds because the company was conservative. At that time, the deposit interest rate was barely 1% per year, and it had been about 4-5 years since the investment in bond funds, but the average annual return was in the 1-2% range, which was very low. In the latter half of 2020, the market was in a state of high liquidity due to the COVID-19, and I suggested to management that we sell the bond funds and move the assets into equity-type assets. This suggestion was accepted thankfully. Since the company doesn’t directly invest in stocks, I requested several institutions to offer the funds or how you would run.
Over the next 2-3 weeks, we received pitches from various institutions and funds. Fund managers, sales, research teams, etc., all came together and provided neat summaries of domestic and international macroeconomics, industry analysis, overall fund management strategies, top picks, target returns, etc. When I listened to them, it seemed like we would achieve high returns, and I thought there were really a lot of smart people in the world. Since we couldn’t accept all the institutions, we selected a few and decided to track the performance of each institution. By the end of 2020, we had made double-digit returns just by selling the company’s bond-type assets and moving them into equity-type assets as the liquidity reached its peak. Looking back, every day was so much fun because it was unrealized gain but that was quite a few million dollar.
Then, 2021 came, and even though it was still a time of high liquidity, I remember that the market conditions became challenging from the second half of the year. The return rates from the funds we invested in were like a roller coaster, and some funds even recorded negative returns. While the overall company return rate was good, I requested feedback to a institution on the poor performance. In response, I often heard apologies and that it would take some time to turn things around. Or that it was a good opportunity to invest more now and reduce the average purchase price.
Through these experiences, I became convinced that the market is an unpredictable entity. Even though industry experts analyze and devise strategies, someone will always be wrong. It doesn’t mean that their abilities are lacking, but rather that no one can be sure about the market, so naturally, mistakes will be made. Short-term predictions may be accurate most of the time, but I think it’s too difficult to consistently make long-term predictions without making mistakes. So, in the same vein, active funds seem to be incapable of beating index funds in the long run. This is also the idea presented in “The Simple Path to Wealth”.
Why most people lose money in the market
o They think they can time it – they can’t o They believe they can pick individual stocks – they can’t o They believe they can pick the right mutual fund managers – they can’t o You can’t time the market, so don’t even try
Ultimately, it reminds us that investing in indexes for the long term is the best choice. We must acknowledge that as long-term investors, it’s difficult to beat the market, and we must always keep in mind that investing blindly in pension savings funds or tax-benefit accounts is the best option. It seems that becoming wealthy slowly, rather than waiting for someone else’s time, is the way to go.
As a side note, among various investment instruments, I like stocks the most. When I think about the reasons for this, I wonder if there is any other assets besides companies and organizations that has the tenacity to survive and grow compared to other investment instruments. After coming to the U.S., I realized that the labor flexibility here is so free. When things are good, everyone is happy, but at the slightest sign of difficulty, there are immediate layoffs and cost reductions, and they do whatever they can to squeeze and stabilize. Through such periodic activities, they improve their structure and find other ways to eat, growing at a rate of 8-10% annually. Among them, it seems that the U.S. is the best in terms of market aspects. In terms of financial scale, it’s number one, it’s a black hole for world talent, it improves costs through efficiency, and there is steady inflation, so I don’t think it will be easy to find a better investment market than the U.S. in the future.
My pension portfolio. After going round and round, I have finally completed the composition of my 3-tier personal/retirement pension portfolio. The following posts summarize the traces and the change I experienced regarding portfolio composition.
I have no plans to change my portfolio until the age of 50. Since we have 100 years lifespan, I believe it’s okay to be 100% exposed to the market until before turning 50. And the current plan is to rebalance the assets to dividend stocks or bonds five years before retirement. Actually, it’s an option to leave my portfolio as they are after the retirement. Oh, of course, when I return to Korea, I will stop to make contributions to Social Security Retirement and investments in Roth IRA accounts.
Type
Name/Account
Annual Contribution
Investment
Remark
National Pension
NPS (KR)
Income 4.5%
N/A
1st tier pension
Social Security Retirement (US)
Income 6.2%
Corporate Pension
DB
–
2nd tier pension
Individual Pension
Pension Saving
18M KRW
KODEX S&P500TR (50%)
KODEX Nasdaq 100TR (50%)
3rd tier pension
ISA
20M KRW
IRP
–
–
Roth IRA
$7,000
Vanguard S&P 500 ETF (VOO)
Sidebar
Although pension investment is the main focus, it can get a bit tedious doing just that. (Although it suits my aptitude well, the road to becoming wealthy is not easy.) Oh, actually, it’s not so much that it’s tiring when I don’t pay attention, but rather that I’m curious about other stimulating things in different neighborhoods.
These days, domestic stock markets seem to be gaining popularity through value-up programs. Hoping for the Korean economy to do well, I would like the index to reach 4,000, and although I want to invest (if I do, it would be in KODEX 200 TR), it’s not as easy as I’d like it to be. Still, should I put in a little more… If the annual growth rate is 10%, the KOSPI index should exceed 18,000 in 20 years. Can it really happen… Looking at my Korean stocks, maybe not doing anything is the right move… Korean stocks aren’t easy.
100-year Lifespan. While running a blog related to personal pension investment, the biggest limitation on this topic is the difficulty in producing new content. No matter how much I want to post, the reality is that there is little to say beyond advising to contribute the maximum annual limit to pension funds and IRP accounts for tax deductions and deferred tax purpose, monthly purchases of S&P 500 ETFs, and withdrawing 4-6% annually for post-retirement living expenses. It’s a topic that countless experts have already covered extensively and historically proven, unless there are updates related to investment or tax issues like the recent ISA revisions. Therefore, the fate of a pension investment blog is to delicately and elaborately draw out postings on the same topic without too much overlap each time.
Contemplating on What to Write About, I decided to share my journey as I delved into the world of personal pension investment in earnest. Additionally, I want to discuss the changes in my attitude towards life and mindset that occurred as I started investing.
Initial Thoughts When Introduced to Pension Savings
I first heard about the pension savings system roughly a decade ago. While there were many pros and cons regarding the system, what caught my eye the most was the requirement to contribute for a minimum of 5 years and the fact that the money was tied up. My initial thought was, “Why invest in something where the money is tied up for 5 years?” I thought it was a useless system since I could just invest in individual stocks in a regular account and potentially double or triple my investment. Looking back, it was truly a pitiful thought. They say if your mind is weak, your body suffers, don’t they? Having such foolish thoughts, years have passed by. If I had started investing back then, I could have retired by the age of 50…100-year Lifespan
Sudden Thoughts on Retirement
Although I am generally a thoughtful person, I mostly have a positive and optimistic mindset, believing that things will work out if I just put in the effort. So, I didn’t really have any fear about retirement; rather, it would be more accurate to say that I didn’t even think about retirement. However, by chance, I watched a documentary about the era of 100 years on EBS, which led me to think, “Ah, our generation will live long. Then we’ll need a lot of money after retirement. What preparations should we make?” After learning more about the era of 100 years, I chose one book from several books and luckily, it became a turning point in my life.
After starting pension investments, I’ve advised some people around me to invest. I’ve had discussions with close friends or younger friends from time to time, and I’ve explained in detail because it’s so important. There’s a friend who’s my closest friend, but he doesn’t listen even after talking for over 5 years. On the other hand, there’s someone who asks questions and immediately takes action even after talking only once or twice. Although there’s a high chance that they don’t fully understand and just execute, I think it’s a good start because starting is half the battle.
Upon reflection, I realized that simply advising someone to start pension investments is similar to parents telling their children to study hard and read a lot of books. Usually, when you say something like that, people are less likely to do it. Smart friends who know their goals and why they need to study will achieve what they want, and have a higher chance of success. Ultimately, to persuade someone why they need to study, it’s important to mix background, context, and experiential stories evenly, and I believe that pension investment-related explanations are like those books. Of course, one book won’t solve all problems. Even after reading dozens of books on pensions and investments following the “100-Year Shock” book, I think it’s a very good starting point for pension investment. 100-year Lifespan.
Changes in Attitude and Life Afterward
Certainly, I feel more relaxed and confident. This is because I am confident that if I fill the pension contribution amount I want, I will receive the retirement living expenses I want each month after retirement without any regrets, even if I quit the job. Therefore, I am making efforts to learn things I want to do during my leisure time after retirement. Wouldn’t it be cooler to do well in the next 20-30 years than to learn new things at the age of 60?
Also recently, I’ve been thinking a lot about jobs. Life seems too short to experience only a few jobs. Although it would be difficult if the income is too low, if I can receive an income that fills my desired pension every year without difficulty, I think it’s good to experience other jobs I want to try.
I hope many people around me understand the importance of pension investments and consistently execute them. I also hope we all have a leisurely retirement life together. It would also be rewarding for me to work in related industries. 100-year Lifespan.
Comparing US index and dividend investing Conclusion: Investing index funds are the best.
In this post, I aim to compare the performance of dividend investing and investing in US indices (US index ETFs) over the same period. Additionally, I’ll compare the average annual growth rates of US real estate and Seoul apartments to determine which investment strategy is more competitive.
As previously shared, I allocate half of my retirement account to the S&P 500 and half to the Nasdaq. As many of you already know, investing in US indices is the best choice for retirement and long-term investments. Additionally, I mix in the Nasdaq to maximize returns. Since retirement is still 30 years away, I can afford to ignore the volatility of the Nasdaq.
Advantages of Dividend Investing:
However, dividend investing has gained attention in recent years. Investing in US dividends allows for receiving dividends in dollars, enabling foreign asset holdings, and monthly dividend products can generate monthly cash flow. When I asked ChatGPT about the benefits of dividend investing, it provided the following list:
Regular Income: Dividend-paying stocks provide regular cash flow to investors at regular intervals, helping cover living expenses and other costs.
Stable Returns: Some large companies generate stable and predictable profits over several years, making dividends stable. This protects investors from unexpected volatility.
Suitable for Long-Term Investment: Dividend stocks are suitable for long-term investment strategies. Over the long term, both stock prices and dividend income can increase together.
Mitigation of Stock Market Volatility: In addition to expectations of company growth, dividends provide income. This makes dividend stocks relatively insensitive to market volatility.
Signal of Company Health: Dividend payments can indicate a company’s healthy financial status and stability. Companies that pay dividends often have stable cash flows and capital structures.
Reinvestment Opportunities: While dividends can be received in cash, they can also be reinvested in the corresponding stocks. This allows for compounding effects.
Despite these advantages, I have been hesitant about dividend investing. My reasoning is as follows: Firstly, as I concluded in a previous post that I won’t be investing in bonds for a while. I thought that now is the time to expose myself to as much risk as possible in my investments. This doesn’t mean that dividend investing is wrong, but I believe that for investors in their 20s and 30s, it’s better to invest as much principal as possible in stock assets exposed to the market to maximize compound interest. Ironically, over a period of more than 10 years, stocks have the lowest risk. As with bonds, I plan to gradually shift a significant portion of my existing assets to dividend stocks or bonds to align with my retirement age. Secondly, dividends are subject to immediate dividend income tax. The most important factors in pension investment are time and tax deferment. If you pay a 15.4% income tax on dividends every year, that money won’t work, and as time accumulates, the gap will grow much larger. Now I want to simulate the performance of each investment.
Comparison of Dividend Stocks vs. US Index Investment Performance:
I used the Portfolio Visualizer, as introduced in the previous post (reference link below), for performance comparison. I conducted backtesting with investment periods and products. Although I wanted to test for a longer investment period, the oldest dividend ETF I found was SDY (SPDR S&P Dividend ETF) launched in ’06, so I set the period from ’06 to ’23 (a total of 18 years). The investment capital is $10,000, using the Buy-Hold method, and dividends were reinvested automatically.
* Dividend yields may vary within the simulation period
Performance Comparison
Ticker
Principle
Appraised (norminal)
Appraised (inflation adjusted)
CAGR (norminal)
CAGR (inflation adjusted)
Standard Deviation
Best Year
Worst Year
SDY
$10,000
$44,931
$28,827
8.7%
6.1%
15.2%
30.1%
-22.8%
SPY
$10,000
$54,001
$34,645
9.8%
7.2%
15.5%
32.3%
-36.8%
QQQ
$10,000
$117,119
$75,140
14.7%
11.9%
18.7%
54.9%
-41.7%
As expected, the performance of index investing is superior. Cumulative returns for each ETF based on inflation-adjusted standards are 288%, 346%, and 1,171%, respectively. I found that the standard deviation for SPY is similar to that of the dividend ETFs, likely because of the long-term nature of the investment. In the market, it seems that companies that generate grwoths receive a higher premium than those that only distribute dividends. As mentioned above, the results are based on the Buy-Hold method. When investing monthly, like in a pension, the gap may be smaller than the table above. Based on past data, I personally think that long-term investment in general indices and growth stocks is better than dividend investing. (Of course, past performance does not guarantee future performance.) Of course, dividends have the significant advantage of providing stable cash flow, so it may be a good idea to decide based on individual preferences and investment cycles.
Comparison of Real Estate vs. US Index Investment Performance:
I was also curious about the results compared to real estate investment. I selected real estate markets such as Seoul apartments and the US housing market and sought data for the past 20-30 years to compare average annual returns and standard deviations. Below are the results found through news searches and Googling.
The characteristics of the real estate and stock markets are clear. In terms of returns, the stock market is overwhelming, but the volatility is high. However, I think that the volatility can be offset when investing for the long term.
I think that from a long-term investment perspective, stock assets are more advantageous. 1) The returns are the highest, 2) cashing out is easier, 3) you can generate cash flow by selling only a portion, and 4) even after selling, you can continue to earn compound interest. Although real estate is undoubtedly more advantageous for making big money, it is similar to timing trading and leverage use, and if the timing is right, it would be great, but if you make a mistake even once, you may be in a situation where you have to wait for several years to decades. The purpose of pension investment is retirement preparation. Retirement preparation aims to create stable cash flow. In that case, it would be more comfortable to bet on the side proven by past data.
To further explain the “4) even after selling, you can continue to earn compound interest,” let’s assume that we start preparing for a private pension at the age of 25 and continue to contribute a fixed amount every month until we are 55. In that case, I think that the average unit price of the invested assets would be the price invested around the age of 40. And if I retire at 60, I will start withdrawing based on the average unit price invested 20 years ago. The withdrawal amount will be determined based on the profits earned over the past 20 years, and if I start withdrawing at 70 with a little more room, I can use the pension for 30 years based on the profits earned from the investment over the past 30 years. So starting pension investment as soon as possible is crucial, and if possible, it would be best to invest as much money as possible when young, as the average unit price would be lower (or higher). A common way to generate cash flow after retirement is to invest in real estate such as stores around the time of retirement to earn rental income or invest in dividend stocks. Although it can provide a stable cash flow, starting before or after retirement may result in a lower efficiency compared to starting early. Of course, I’ll leave out large real estate sizes. Comparing US index and dividend investing.
Until 2023, I set up my pension investment portfolio using the following methods. There wasn’t much to ponder, and I planned to invest like this for decades.
~2023 Pension Portfolio
Type
Name
Annual Investment
Remark
National Pension
NP (Korea)
4.5% of Income
1st layer
Corporate Pension
DB
–
2nd layer
Individual Pension
Pension Saving
15M KRW
3rd layer
IRP
3M KRW
ISA
20M KRW
However, at the beginning of ’24, several considerations arose regarding pension investments. As discussed in the previous post on investing in US treasuries, I found that 1) investment is possible in a Roth IRA account and 2) there have been recent revisions to the ISA contribution limits. Explaining the core advantages of each account once again:
When investing in a US Roth IRA account, profits are entirely tax-free.
When investing in an ISA account, profits are subject to a separate tax of 9.9% excluding the tax-free limit.
With the ISA revision, it is now possible to contribute up to a total of 200 million won to the account. Considering this investment option, and also currently contributing to Social Security Retirement in the US (the US version of national pension), the initially considered revised pension portfolio was as follows:
’24 Review Pension Portfolio
Type
Name
Annual Investment
Remark
National Pension
NP (Korea)
4.5% of Income
1st layer
Social Security Retirement (US)
6.2% of Income
Corporate Pension
DB
–
2nd layer
Individual Pension
Pension Saving
15M KRW
3rd layer
IRP
3M KRW
ISA
20 KRW
Roth IRA
$7,000
It’s worth noting that a comparison between Korean and US pensions has been mentioned in a previous post.
Regarding national pensions, there is a Korea-US Social Security agreement, with provisions including 1) aggregating periods of participation and 2) exemption from premiums (exemption from dual enrollment). If you have been enrolled in US Social Security Retirement for more than 18 months, and the combined enrollment period between Korea and the US exceeds 10 years, you can receive pensions from both sides. For example, if you worked for 15 years in Korea and 5 years in the US, contributing to pensions in both countries, you can receive corresponding amounts from each country’s retirement pensions based on 15/20 and 5/20, respectively.
As an aside, if you return to Korea within 5 years after working in the US, you can receive a refund of the Social Security Retirement contributions made in the US under the Totalization Agreement (provided that you contributed to the Korean national pension during that period). Since the future is uncertain, I am currently contributing, and depending on my future plans, I will decide whether to leave this part as is or to receive a refund. Personally, I’ll keep my options open. It goes without saying, but the basic amount in US pensions is much higher than in Korean national pensions! Every year, the US Social Security announces Cost-of-Living Adjustment (COLA) information, specifying the amount of pension to be distributed for the year. Based on the 2024 Full Retirement standard (commencing at age 67), you can receive $59,520 annually (approximately 77.38 million won at 1,300 won per dollar). Similar to Korea, if you start receiving the pension earlier, the amount decreases, and if you delay, the amount increases. The absolute amount differs significantly from Korea, and since it can be received in dollars, there is an advantage in holding some foreign currency assets.
Another concern was the Roth IRA. Since profits are tax-free without exception, there is no reason not to utilize it, but in reality, it is an account that holds significance when continuously residing in the US. This is because, if you return to Korea, you will have to declare income tax on the profits. Moreover, there are many inconveniences such as remittance fees, exchange fees when sending funds to Korea, and access difficulties to the account due to becoming a non-resident in the US financial system. Additionally, the IRA account can only be invested with Earned Income. Considering that the amount available for contribution may not be substantial upon returning, it seems better to simply invest in a Korean ISA account if one thinks about the hassle in the future. It’s a pity it ended like this, but tax-free profits are truly a missed investment opportunity. In a previous post, I explained the Backdoor Roth IRA, but there is also the option of Mega Backdoor Roth IRA. Simply put, it involves converting the amount contributed to the US retirement pension system, 401(k), directly into a Roth IRA account, and with after-tax additional contributions, you can contribute up to $66,000 annually to a Roth IRA. There may be individual differences, but realistically, retirement shouldn’t pose significant difficulties after just 10 to 15 years.
After much deliberation, the finalized portfolio is as follows:
’24 Confirmed Pension Portfolio
Type
Name
Annual Investment
Remark
National Pension
NP (Korea)
4.5% of Income
1st layer
Social Security Retirement (US)
6.2% of Income
Corporate Pension
DB
–
2nd layer
Individual Pension
Pension Saving
15M KRW
3rd layer
IRP
3M KRW
ISA
20 KRW
Roth IRA
$7,000
For the ISA, I plan to contribute an annual 20 million won+ and maintain it as a pension savings fund for at least 3 years. However, at a certain point (roughly estimated as 10 years before retirement), I plan to stop transferring to a pension savings fund from the ISA account and maintain a principal balance of 200 million won in the ISA account. The reason being, once all pension payments start, I anticipate that the income tax will exceed 9.9%, so it is more advantageous to pay income tax separately from the ISA account. For the time being, I’ll just contribute and buy into each account without much thought.
U.S. Treasury Investment (2) – Traditional IRA vs. Roth IRA (+Backdoor Roth IRA)
U.S. Treasury Investment (3) – Direct Purchase vs. ETF Side Note
2024 Pension Portfolio Plan
U.S. Bond Investment (4) – Real-world Bond Purchase
Regarding U.S. Treasury investment, you can buy directly through a brokerage general account or treasurydirect.gov. However, aiming for retirement readiness, we prefer using an IRA account in the U.S. There are two main types of IRA accounts: Traditional IRA and Roth IRA, as discussed in a previous post comparing the U.S. and Korean pension systems & investment accounts.
To simplify, in Korean terms, Traditional IRA is similar to pension savings funds or IRP accounts. Let’s examine the characteristics of these two accounts:
Traditional IRA vs Roth IRA
Traditional IRA:
Tax-deductible: Tax benefits for contributions.
Tax Treatment: Profits are taxed, and withdrawals are taxable.
Required Minimum Distributions (RMDs): Mandatory minimum distribution from age 72.
Early Withdrawals: 10% penalty before age 59.5.
No Income Limits: No income limit for contributions.
Annual Contribution Limits: $7,000 in 2024 ($8,000 for age 50 and above).
Roth IRA:
Non Tax-deductible: No tax benefits for contributions.
Tax Treatment: Profits are tax-free.
No Required Minimum Distributions: No mandatory minimum distribution.
Early Withdrawals: Penalty-free withdrawals of contributions.
Income Limits: Contribution income limit – $161,000 (single), $240,000 (married) in 2024.
Annual Contribution Limits: $7,000 in 2024 ($8,000 for age 50 and above).
Each account has pros and cons. We need to decide whether to maximize tax benefits for contributions or enjoy tax-free benefits on profits during year-end settlements. For long-term goals like retirement planning, the latter is beneficial. Note that in the U.S., you can even buy private stocks in a Roth IRA account. If you invest in a startup that goes public after a few years, all the profits in this account remain tax-free. Such opportunities would be fantastic.
Roth IRA Issue and Backdoor Roth IRA Solution:
Returning to Roth IRA, there’s a potential problem if your annual total income exceeds $161k (single) or $240k (married) in ’24. For those seeking tax benefits, this can be a significant setback. However, the Backdoor Roth IRA method provides a solution:
Contribute the desired amount to Traditional IRA with no income limits (same limit).
Immediately transfer funds from Traditional IRA to Roth IRA.
Start operating the account with funds in Roth IRA.
Fortunately, the deadline for ’23 contributions is until April 15 in 2024! Although I regret not contributing in ’23, luckily, there’s ample time to include last year’s contribution. In the next post, I’ll explain the procedure for converting from Traditional IRA to Roth IRA.
![[Final Version] 2024 My Pension Portfolio in Korea](https://i0.wp.com/dannydkang.com/wp-content/uploads/2024/04/pexels-photo-14936128.jpeg?fit=1200%2C800&ssl=1)
