What is ISA Account?

This article is to explain what an ISA account is and how to utilize it to your financial advantage. The article will give you summary of the ISA account and things you need to know to maximize the account's benefits. And it will also suggest the best strategies to reap the benefits the ISA has to offer. If you are considering opening an ISA account, this article will prepare you with the information you need to do just that. 

What is an ISA account?

ISA stands for 'Individual Savings Account'. This financial product is sold at banks and security brokerages. You can deposit up to KRW 100M over 5 year period. Being an account overarching multiple financial products, you can make transactions such as

• savings with merchant banks, 
• Korean stocks
• RPs
• funds
• ETFs
• ELS
• REITs

To trade stocks and ETFs/ELS/REITs, make sure you open your ISA account with a stock brokerage, because banks only carry savings products. 

The best part of ISA is it gives benefits of tax exemption or deduction. However, to enjoy these benefits, you are obligated to keep your account for at least 3 years. At the point of 3 years, you can either keep the account for extra 2 years or liquidate whatever is in your ISA account. In addition, you can withdraw cash from the account with the condition that your annual deposit limit will not be recovered after your withdrawal. After you close your ISA account, you can open a new account to last the next 3 to 5 years. 

You can also move your ISA account to other financial institutions, say, from a bank to a brokerage. But remember what would be moved is your account, not what's inside of it. This means you have to liquidate whatever is in your account before moving. Therefore, you might as well close the account and open a new one with the financial institution of your choice. You can have only one ISA account. In other words, you cannot have one ISA with a bank, and another with a stock brokerage. 

How to Maximize the Benefits of ISA

The best strategy to enjoy the benefits of tax relief with ISA is to buy

• ETFs listed on the Korean stock exchange following the foreign stock indexes
• Korean stocks with good dividends

Because foreign stock index following ETFs are subject to transfer tax. However, ETFs transactions within the ISA account will be exempt from the tax. And income tax on dividends is exempted or less than the full rate of 15.4%. 

Deciding if to keep or close the account is important. If your account is in red at the time of the third year, you can choose to keep it open till the numbers turn black. In case you liquidate the account, you can deposit the money from the ISA account to your pension account. In this way, you can extend your tax benefits until you receive your pension payment. 

Summary

If you have an ISA account, you can

• enjoy good tax benefits
• trade stocks and ETFs
• extend tax exemption by putting money from the ISA into your pension account
• buy ETFs following foreign stock index to maximize tax benefits
• open an ISA account with a stock brokerage to buy financial products other than a savings account
• use this account to grow seed money over three to five years.