End of the year offers last chance to nab certain financial products

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End of the year offers last chance to nab certain financial products

Park, 30, was admonished by an older coworker for not enrolling in a so-called asset accumulation savings account, which has been promoted by the government since last year. She was told it wasn’t taxable and that this year was Park’s last chance to open one.

Park was quite interested because the annual tax refund she received in February was paltry, largely because of recent changes to the government’s taxation framework.

Before last year, the government would tax income at a higher rate but also give a bigger annual refund. Now, the government’s income tax rate is the same, but the tax refund has shrunk disproportionately, increasing the burden for most.

But when she visited a bank to inquire about the asset accumulation savings account, she was told that the account wasn’t the only financial product she’d lose access to at the end of the year. A banker urged her to also subscribe to the Sojang Fund, a long-term product that offers unique tax benefits.

“There are too many products promoting different tax exemptions, and the benefits are all different, which makes me confused,” Park said. “I’m more embarrassed that I now have too little time to really think about it.”

Park isn’t alone. As individual tax burdens increased after the policy change last year, consumers have shown greater interest in financial products that help them save on taxes.

But there will be many changes to the tax benefits of existing financial products next year, with the introduction of the individual savings account (ISA) system that allows customers to manage a variety of savings accounts and funds through a single online or mobile platform.

December will be the last month to enroll in certain financial products, which will stop accepting new subscribers starting next year.

The most sought-after financial product is the Sojang Fund.

The biggest draw of the fund is its income-deduction tax benefits, which mean that a certain portion of the money put into the fund can be subtracted from a subscriber’s total taxable income. As a result, the customer’s final tax rate could see a reduction.

The size of the fund is limited to 6 million won ($5,200) per year, and 40 percent of the total - 2.4 million won - can be subtracted from taxable income. The benefit is only available for those who earn less than 50 million won each year.

But there’s a catch.

When the ISA is adopted next year, the amount of money that a customer has put into the Sojang Fund will be counted towards the maximum amount he or she can put into the ISA.

In other words, even though the maximum that can be placed in an ISA is 20 million won, a customer who has maxed out a Sojang Fund would only be allowed to put in 14 million won.

Since the Sojang Fund can’t be canceled for a preset period even if yields are low, those who didn’t realize the situation might feel duped.

“In terms of flexibility of management, the ISA may be more useful,” said Yoo Dong-wan, a research fellow at NH Investment & Securities. “But I recommend putting some pennies in the Sojang Fund because it is the only income deduction-based product.”

The asset accumulation savings account will also disappear next year. It is the only untaxable savings product for young people who earn 50 million won or less, as those older than 60 have their own.

Customers can put up to 3 million won into the account per quarter, and the maximum size is capped at 12 million won. The amount of investment in the account is also excluded from the ISA.

High-yield funds that offer tax-saving benefits by being considered a separate income source will also offer fewer benefits next year.

Normally, if income from financial investments exceeds 20 million won, the surplus is included as general taxable income and taxed at a higher rate. The high-yield fund is exempted from this rule, and there’s no income limit on subscribing, making it popular among the wealthy.

The size of the fund has normally been capped at 50 million won, but next year, the maximum size will be reduced to 30 million won.

According to Zeroin, a fund assessment organization, the average yield of the funds was between 9 and 15 percent for the past year. The total investment in the funds surpassed 1 trillion won this year, largely due to their tax benefits.

“But consumers need to be aware of the fact that high-yield funds invest in BBB+ bonds or less and small businesses listed on the Konex, [the third stock market for start-ups] so they have high risks,” said Hwang Yun-ah, a researcher at Zeroin.

BY JUNG SUN-EAN [song.suhyun@joongang.co.kr]
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