The South Korean government has reversed its plan to reduce benefits for the Individual Savings Account (ISA) just a month after its initial announcement. The proposal to limit the contract period to a maximum of five years and to prevent the carryover of unused contribution limits has been withdrawn. Existing and new subscribers can continue to utilize the general ISA as before.
On September 1, the government finalized a tax law amendment during a Cabinet meeting, maintaining the current terms for ISA contract periods and contribution limit carryovers. The previously proposed expiration date for new general ISAs at the end of 2029 has also been rescinded.
The initial reform plan announced last month included restrictions on the general ISA's contract period and a prohibition on carrying over unused annual contribution limits to the following year. This sparked backlash, as it was seen as incompatible with the ISA's purpose of long-term investment.
Critics argued that the changes would disproportionately affect young people, low-income individuals, and self-employed workers with fluctuating incomes, who often struggle to meet the annual contribution limit of 20 million won. President Lee Jae-myung also instructed a comprehensive review of the ISA reform plan. Consequently, the government has decided to maintain the existing structure of the general ISA.
The mandatory subscription period for the ISA is three years, after which the account can be extended indefinitely. The annual contribution limit remains at 20 million won, with a total limit of 100 million won. Unused annual limits can be carried over to the next year.
For instance, if an individual contributes only 5 million won to their ISA this year, the remaining 15 million won does not expire. They can contribute up to 35 million won next year, combining the unused limit with the new annual limit of 20 million won. This allows individuals to open an account in advance and accumulate contribution limits even if they currently lack investment capacity.
The key advantage of the ISA is its tax benefits. The net profit, calculated by combining gains and losses from the account, is tax-exempt up to 2 million won for the general type and 4 million won for the low-income and farming type. Any amount exceeding these limits is taxed at a rate of 9.9%, which is lower than the 15.4% tax rate on interest and dividend income from regular financial products.
For example, if a general ISA generates a net profit of 5 million won from interest and dividend income, the tax applies to 3 million won after excluding the 2 million won tax-exempt limit. This results in a tax of 297,000 won, significantly lower than the 770,000 won tax that would be incurred if the entire 5 million won were taxed at the regular rate.
The choice of assets is also crucial. Products like overseas index exchange-traded funds (ETFs) listed on the domestic stock market, which incur capital gains and dividend taxes in regular accounts, offer significant tax benefits when held in an ISA. Conversely, domestic stocks generally enjoy tax exemptions on capital gains for individual investors, making it more efficient to focus on dividend stocks and taxable ETFs within the ISA.
The government plans to introduce a new productive finance ISA next year. If the proposal passes through the National Assembly, interest and dividend income from domestic stocks, domestic equity funds, national growth funds, and business growth collective investment schemes (BDC) will be tax-exempt without limits. Since capital gains from domestic stocks are mostly tax-exempt in regular accounts, additional tax benefits are expected to arise primarily from dividend stocks and taxable funds.
The contribution limit for the productive finance ISA will be 20 million won annually, with a total limit of 200 million won. The revised proposal allows this account to maintain the maximum contract period limit without restrictions after the mandatory subscription period of three years, and unused contribution limits can be carried over to the next year.
Once the productive finance ISA is introduced, it can be held alongside the existing ISA. Investors can contribute up to 20 million won to each account annually, totaling 40 million won. It is also possible to allocate overseas index ETFs to the existing ISA and domestic dividend stocks and domestic equity funds to the productive finance ISA.
However, the productive finance ISA is still pending review by the National Assembly. There is no need to terminate the existing ISA or transfer investments beforehand. It is advisable to maintain the current ISA while waiting for the final investment targets and tax benefits of the productive finance ISA to be confirmed, allowing for a strategic approach to utilizing both accounts.
* This article has been translated by AI.
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