Office worker A began investing in stocks this year, enjoying the gradual accumulation of returns through stocks and exchange-traded funds (ETFs). While there are losses, A is minimizing them through cautious strategies. Initially, the biggest concern was which stocks to buy, but as the investment grew, A became interested in ways to reduce tax burdens. Hearing that the importance of tax-saving strategies increases with financial income from ETF dividends and savings interest, A was intrigued by a colleague's simple advice: "Have you opened an ISA account?"
No place is free from taxes. Wherever there are profits, taxes follow, and the stock market is no exception. Although the amounts are not as large as in real estate, paying less tax can enhance returns. A key tax-saving tool in the stock market is the Individual Savings Account (ISA). Let's explore how to utilize ISA for tax savings.
Over 10 million people have opened ISA accounts
According to the Korea Financial Investment Association, as of the end of August, the number of ISA account holders reached 10.05 million. This marks a significant milestone, surpassing 10 million for the first time since its introduction in March 2016. Compared to the adult population of approximately 44.07 million, one in four adults now holds an ISA account.
The growth in account holders has been rapid. After surpassing 8 million at the end of January, the number increased by over 2 million in just seven months. During the same period, the total amount invested rose from about 55 trillion won to 76.5 trillion won, with the average investment per account around 7.62 million won. The increase in participation in the stock market, driven by the rise in domestic stock prices, has led to a demand for managing various financial products within a single account while enjoying tax benefits.
The composition of account holders shows a notable shift among younger generations. The proportion of ISA holders in their 20s and 30s rose from 32.8% at the end of 2020 to 41.1% by the end of August this year, an increase of 8.3 percentage points. Notably, 95.1% of these younger investors are using investment-type ISAs, where they select and manage stocks and ETFs directly. This indicates a growing trend of investors choosing products based on market conditions while also considering tax implications.
Tax-free benefits up to 4 million won are appealing
The main attraction of the ISA is the ability to manage assets while reducing tax burdens. Various financial products, including domestic listed stocks, ETFs, funds, and savings accounts, can be held in a single account, and profits and losses within the account are netted for tax purposes. The general type allows for tax-free income up to 2 million won, while the low-income type allows for up to 4 million won.
For net income exceeding the tax-free limit, a separate tax rate of 9.9% applies. This is significantly lower than the typical withholding tax of 15.4% on interest and dividend income from regular accounts, providing a potential tax-saving benefit. Additionally, the tax payment can be deferred until the account is closed, allowing for reinvestment of funds that would otherwise be taxed during the investment period.
Before opening an account, potential investors should consider the eligibility criteria. Individuals aged 19 and older, including workers aged 15 and above, can apply, but those who have been subject to comprehensive taxation on financial income in any of the last three tax periods are restricted from opening new accounts. The annual contribution limit is 20 million won, with a cumulative limit of 100 million won, and there is a mandatory holding period of three years. However, not all investment income is taxed more favorably in an ISA; income that is tax-free in regular accounts, such as typical capital gains from domestic listed stocks, should be distinguished when considering tax-saving benefits.
A representative from the financial investment industry stated, "Managing ETFs and other investments through an ISA can aid in long-term asset formation while benefiting from tax advantages. For those just starting to invest, it is essential to consider not only which products to buy but also the tax implications and account structure."
A productive finance ISA is on the way
The ISA was not always as popular as it is today. Initially, the account was limited to wage earners, business income earners, and farmers and fishermen, with a mandatory holding period of five years to receive tax benefits. However, in 2021, the eligibility criteria were relaxed, and the mandatory holding period was reduced to three years, making it more accessible. Changes in the system and investment environment have revived interest in ISAs as a choice for investors.
Additionally, a new tax-saving account is set to be introduced. The government is preparing to launch a "productive finance ISA" aimed at long-term investments in domestic stocks and domestic stock-type ETFs. The proposed plan includes tax-free interest and dividend income, an annual contribution limit of 20 million won, a total limit of 200 million won, and a 10% income deduction for contributions made by young individuals with incomes below a certain threshold. Unlike the existing ISA, the tax-free range will be expanded, allowing for full tax exemption on interest and dividend income generated within the productive finance ISA. The total contribution limit will also increase from 100 million won in the existing ISA to 200 million won in the new account. However, since the investment targets and tax benefits differ from the existing ISA, it is essential to confirm the final details regarding the implementation date and specific eligibility requirements.
* This article has been translated by AI.
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