[비즈한국] The market is stirring over the Individual Savings Account (ISA), which has established itself as the synonymous "go-to" tax-saving account. When the government's direction for ISA reform, included in the tax code revision, became known, it triggered a backlash from subscribers, ultimately leading the government to announce on the 9th that it would begin a review, stating, "We will actively consider the need for supplements." Nothing has been finalized yet. However, as the government’s intent for how it plans to adjust the system has been revealed, those who are already managing an ISA or considering opening one should take this opportunity to organize their current situation.
The government's proposal centers on three points. First, the contract period for general ISAs, which can currently be extended indefinitely, will be limited to a minimum of 3 years and a maximum of 5 years. Second, it will eliminate the "contribution carryover," which allows unused annual contribution limits to be rolled over to the following year. Third, it will create a new "Productive Finance ISA," which only invests in domestic assets, with full tax exemption on interest and dividends and a significantly increased total contribution limit of 200 million won. Implementation is scheduled for next year.
The new account, which offers the greatest tax benefits, can only hold domestic assets, making it less attractive to those who have been investing long-term in overseas markets via domestically listed S&P 500 or Nasdaq 100 ETFs. Furthermore, tying even a general ISA to a 5-year limit has sparked complaints, with people asking, "Do I have to break my account every 5 years?" For subscribers who would dump unused contribution limits into the account in years they had extra cash, the abolition of the carryover is also a disappointing point. Ultimately, while the intent to channel funds into the domestic stock market is understandable, criticism has persisted that it narrows the investor's options, and with even the President and the ruling party calling for a re-examination, the government has begun to look into potential improvements.
Therefore, the most important principle right now is "not to treat the reform as a finalized system." Whether the contract period will be 5 years, whether the contribution carryover will truly be abolished, and how the detailed requirements will be refined can all change through discussions in the National Assembly and government adjustments. There is no need to rush to close an account or make a forced switch based on a reform proposal that has not yet been implemented.
To start with what you can be reassured about: even if the reform is implemented as planned, the maturity of your current ISA will not suddenly be reduced to 5 years. The contract period limit is designed to apply to accounts newly opened or extended after next year, so there is no need to urgently clear out existing accounts. However, the abolition of the contribution carryover is a different story. Under the government's plan, even existing subscribers would be blocked from carrying over contributions starting from next year. While existing contract periods will be honored, the new rules for contribution methods would apply to existing accounts as well. Also, even after the reform, the path remains open to indirectly invest overseas in general ISAs through domestically listed overseas index ETFs such as the S&P 500 or Nasdaq 100. The misunderstanding that "overseas investment will be completely blocked" is far from the truth.
An ISA taxes only the net profit remaining after adding up the gains and losses from taxable financial products within the account. Since it is difficult to broadly net profits and losses across different financial products in a general account, this effect is particularly significant for investors who manage multiple taxable funds or financial products together. Regardless of how the contract period or limits are adjusted through the reform discussions, this structural advantage itself will not disappear.
Those who were considering opening an account might want to weigh two options. The current ISA is still an attractive tax-saving vehicle, providing a tax exemption on interest and dividend income up to 2 million won (4 million won for low-income earners) and a 9.9% separate taxation on any excess. This benefit will be maintained in the reform plan. On the other hand, if you anticipate significant taxable dividend or interest income from domestic dividend stocks or funds, the full tax exemption and higher limit of the Productive Finance ISA coming next year might be more advantageous. However, capital gains from trading domestically listed stocks for individual investors are already tax-exempt even in general accounts. Therefore, the true value of the Productive Finance ISA depends not on how many domestic stocks you hold, but on how much profit you generate from dividends and taxable funds.
Young people, in particular, should keep an eye on the new account. The government's proposal includes a benefit for subscribers aged 15 to 34 with a total annual salary of 75 million won or less, or a total comprehensive income of 63 million won or less, allowing for a 10% income tax deduction on contributions to the Productive Finance ISA. If you fill the annual contribution limit of 20 million won, the amount eligible for the income deduction is 2 million won. A path has also been opened to transfer maturity funds from existing ISAs and the "Youth Leap Account" into the new account. If you are a young professional looking to build a nest egg with domestic assets, this account could become a leading option after next year.
So, what should you do right now? If you already have an ISA, rather than making hasty moves with your account, just check your accumulated profits/losses, contribution limits, and contract maturity. If you don't have an account yet and want to hold domestically listed overseas index ETFs, one strategy is to start operating with the current ISA this year instead of waiting for the reform to be finalized. Since the Productive Finance ISA is designed to be held alongside existing ISAs, there is no need to delay using a current ISA while waiting for the new one. Next year, you can decide whether to add a Productive Finance ISA based on the proportion of your domestic dividend/interest income and the eligibility requirements for the youth income deduction. In any case, there is no reason to close your account due to a reform proposal that hasn't been finalized.
The separate taxation on dividends from high-dividend companies implemented this year, the Productive Finance ISA, and the proposed measures to prevent "stock price suppression" are all part of a policy flow aimed at resolving the undervaluation of the domestic stock market. However, their mechanisms differ. Dividend income separate taxation encourages shareholder returns, ISAs attract investment funds into the domestic market, and anti-suppression measures curb artificial undervaluation intended to reduce inheritance and gift taxes. As an individual investor, rather than swimming against this tide, it is more realistic to select and use accounts based on whether your investment goals are domestic or overseas, and whether you intend to use the funds in 3 years or 10 years.
The principles for choosing an account do not change even if policies shift. Tax benefits do not come from the name of the account, but only materialize when the account’s investment horizon and targets align with how you intend to use your money. Keep an eye on the direction of the ISA reform, but before rushing, it’s time to re-check your own investment timeline.