Cap on Carryover, Limits on Overseas Investment: Changes to ISA Accounts Draw Attention

[Anchor]

ISA accounts, introduced to help the public build wealth and encourage long-term investment, have already surpassed 9 million subscribers. With the latest tax reform bringing numerous changes starting next year, complaints are rising that benefits may be shrinking.

Morning Zoom-In, reporter Min Gyeongho has the details.

[Reporter]

An ISA is relatively tax-efficient, offering tax exemptions on profits up to 2 million won and a 9.9% separate taxation rate on anything above that.

The contribution limit is 20 million won per year, up to a total of 100 million won. Previously, if you failed to use your annual limit, you could carry it over to the following year.

In extreme cases, it was possible to leave the account untouched for four years and deposit the full 100 million won all at once in the fifth year.

However, starting next year, unused limits will expire within that year.

This rule will apply equally to existing ISA accounts.

Another major change is that the maximum contract period is now restricted to 5 years.

Another advantage of the ISA was that tax calculations were deferred until maturity.

For instance, let us look at a case where a person makes a 10 million won profit in the first year, a 10 million won loss the next year, and a 2 million won profit in the third year.

Normally, taxes are paid on profits earned in a given year, but you do not get a tax refund just because you suffered a loss in the second year.

However, in an ISA account, if it reached maturity right after the third year, taxes would only be levied on the final net profit of 2 million won.

Since that falls within the tax-exempt limit, there would ultimately be no tax to pay.

Because of this, people used to extend maturity dates indefinitely, for example to 99 years, to control the timing of their tax settlements. Critics pointed out that this effectively allowed indefinite tax deferral, prompting the government to shorten the period to 5 years.

Since this does not apply retroactively to existing contracts, individuals who meet the extension requirements within this year can still avoid the time limit.

A new addition is the Productive Finance ISA.

Both interest and dividend income are entirely tax-exempt, and young adults aged 34 or younger can also receive income deductions.

It has an annual limit of 20 million won, a total limit of 200 million won, and can be extended for up to 10 years.

Unlike regular ISAs, however, it cannot be used to invest in overseas stock ETFs, such as U.S. index funds.

[Interview: Lee Su-jin / Senior Specialist, Digital Pension Customer Team, Samsung Securities] "If you mainly invest in domestic stock dividends, [the Productive Finance ISA] exempts 100% of interest and dividends from taxes. [However,] domestic-listed overseas ETFs and similar products are not included. For those who prefer that type of investment, investing in the existing general ISA..."

Criticism has emerged that blocking overseas investments in the new ISA forces investors into domestic stocks. The government explained that given the substantial tax benefits, it also took into account the stabilization of the exchange rate alongside boosting the domestic stock market.

(Video Editing: Kim Jin-won)