The order of account allocation to prevent tax leakage
If you keep cash only in a savings account, its value decreases every month by the inflation rate. If you are an office worker with an annual salary of 50 million won, start by securing your tax refund. By putting 6 million won per year into a Pension Savings Fund and 3 million won into an IRP, you will receive a 16.5% tax credit during the year-end tax settlement, getting back 1,485,000 won.
The order is as follows:
- Fill the 9 million won annual limit by combining the Pension Savings Fund and the IRP first.
- Send any remaining surplus funds to a brokerage-type ISA account. You can deposit up to 20 million won per year.
- Reinvest your year-end tax refund back into your pension or ISA accounts.
Following this routine alone is like earning a guaranteed return of over 10% every year. Compound interest grows the longer you leave the money untouched.
Investing in overseas stocks with an ISA account
If you buy overseas ETFs in a general stock account, 15.4% of your profits are deducted as dividend income tax. However, an ISA account is different. It calculates taxes only on the net profit after offsetting losses against gains. For example, if you earned 10 million won from stock A and lost 6 million won from stock B, you are taxed only on the 4 million won in an ISA. You can save about 1.34 million won in taxes compared to a general account. Based on a 20 million won principal investment, this has the effect of increasing your real return by 6.7%.
The way to use an ISA account is simple:
- Open a brokerage-type ISA account at a major securities firm such as Mirae Asset Securities or Korea Investment & Securities.
- Choose domestic-listed ETFs that track the U.S. S&P 500 or Nasdaq 100.
- Upon reaching the 3-year maturity, terminate the account and move the money back into your pension savings account.
At this time, you receive an additional tax credit of 10% of the amount transferred to the pension account.
Eliminating decision fatigue with automatic purchases on payday
The process of worrying about whether to buy stocks every month only wastes energy. If you set up automatic purchases, you will acquire more shares when the market drops. It is a structure where you buy 10 shares when the stock price is 100,000 won, and 20 shares for the same amount when the price drops to 50,000 won. Your long-term average purchase price naturally drops to 66,000 won.
Complete the automatic purchase settings in your securities app:
- Set the purchase date for two days after payday. Set it so that the remaining money is invested after your credit card bills are paid.
- Utilize features like 'Pension Collection' from Mirae Asset or the automatic trading function of Korea Investment.
- Invest a fixed amount every month into index-tracking ETFs.
Just by reducing the hassle of monthly investment decisions, the probability of quitting midway drops significantly. A system is more accurate than emotions.
