IRP Taxation and Withdrawal Taxation

When you put money into an IRP (Individual Retirement Pension), you receive a tax credit up to 9 million won a year combined with pension savings.

The credit rate is 16.5% if total salary is 55 million won or less, and 13.2% if above. Fill 9 million won and you get back up to 1.485 million won (when 16.5% applies) at year-end settlement.

The IRP is both an account for parking the severance pay you received from a company and an account for individuals to additionally accumulate retirement funds. However, the IRP has a rule that, apart from safe assets like deposits and bonds, risky assets such as equity-type products can be held up to only 70% of the accumulated amount.

When you make gains from funds/ETFs in an ordinary account, 15.4% is deducted from dividends and interest each time. But inside an IRP, gains generated during management are not taxed right away and are deferred until you later withdraw. This is called "tax deferral."

Since even the money that would have been taken as tax keeps getting reinvested, the compounding effect grows. For instance, deducting 15.4% of your gains as tax each year, versus running even that money and later settling all at once at a low rate, can produce a fairly wide difference in the final amount over the long term.

If you are 55 or older and 5 years have passed since opening the account, and you receive it split out in the prescribed pension form, you pay only a low "pension income tax."

The rate varies by the age at which you receive it: 5.5% for ages 55–69, 4.4% for 70–79, and 3.3% for 80 and above (all include local income tax). It is designed so the rate falls the older you are.

Compared with the 15.4% of an ordinary account or the 16.5% other-income tax we'll see later, it is far lower. This is why the IRP's tax-saving effect is maximized "when you receive it slowly as a pension."

For reference, if you receive severance pay into the IRP and take it as a pension, the retirement income tax you would originally pay is also reduced by 30–40%.

This is the key part. If you terminate the IRP mid-term, or take it out as a lump sum rather than a pension before age 55, a 16.5% other-income tax is levied on the contribution principal that received the tax credit and on the investment gains.

It effectively means coughing back up the tax credit you'd received at 16.5%, so the tax-saving gain disappears. On top of that, since 16.5% also attaches to the investment gains, in some cases you end up paying more than the benefit you received.

So the IRP should be approached not as "emergency cash to break open when in a hurry" but as "long-term funds for after age 55." Before contributing, be sure to consider whether "this money can be tied up for a long time."