What is IRP?
An Individual Retirement Pension (IRP) is a system that allows employees to deposit their retirement funds into a personal retirement account, which can later be used as pension funds or other retirement savings. It was introduced in 2012 as a replacement for the Individual Retirement Account (IRA) to address its shortcomings.
Unlike the IRA, the IRP can be opened by anyone, regardless of employment status, and allows voluntary contributions of up to 12 million KRW per year. Investors can choose from a variety of financial products, including deposits, funds, bonds, and equity-linked securities (ELS).
Pros of IRP
1. Tax Deduction Benefits
One of the biggest advantages of IRP is its tax deduction benefits. When combined with a private pension savings plan, an individual can receive tax deductions on up to 7 million KRW annually (4 million KRW for private pension savings + 3 million KRW for IRP).
- For employees earning less than 55 million KRW per year, the maximum tax deduction is 1.15 million KRW.
- For employees earning over 55 million KRW per year, the maximum tax deduction is 920,000 KRW.
2. Investment Flexibility
- IRP allows individuals to choose from a variety of financial products offered by different financial institutions.
- If invested in principal-guaranteed products, the initial capital is protected.
3. Tax Deferral Benefits
- Investment profits within an IRP account are tax-deferred, meaning no taxes are applied until withdrawal.
- During the investment period, financial income tax is exempt, allowing for reinvestment of full profits.
Cons of IRP
1. Taxation on Withdrawal
- When withdrawing funds, deferred taxes are applied:
- Lump-sum withdrawal: Subject to retirement income tax.
- Annuity withdrawal: Subject to pension income tax (typically ranging from 6% to 42%, depending on age and withdrawal method).
2. Investment Limitations
- IRP does not allow direct investment in individual stocks.
- Management fees apply, which vary depending on the financial institution and asset size.
- At least 30% of IRP assets must be allocated to safe investments, limiting investment flexibility.
3. Penalties for Early Termination
- If the IRP account is closed before retirement, a 16.5% additional tax is imposed on the withdrawn amount.
Conclusion
We have reviewed both the advantages and disadvantages of IRP. While IRP has a long investment period, it offers significant tax benefits and serves as a partial retirement savings plan. If you have a stable income source, studying and actively managing your IRP can be a valuable long-term investment strategy.
