With the first batch of Olim recently coming to the end of their 10 year tax-free period on passive investment income, many clients and advisers alike have been scratching their heads as to what is the best way to invest going forward.
There is a lesser-known gem of a vehicle in Israel, that can allow the Oleh to, at worst, pay 40% less tax on investment gains than they would otherwise, and, at best, defer tax on the gains indefinitely.
What is it?
Putting it very simply, it is a Kupat Gemel - Provident Fund – that follows Tikun 190, which was an amendment to the tax code a few years back. Among many things, the amendment allows lump sums of money to be invested in a provident fund wrapper and to be accessible after the age of 60, either as regular pension income or, potentially, as a lump sum withdrawal.
How Does it Work?
Either you choose which company you want to use as your wrapper provider, manage your funds and invest in a selection of their investment tracks (e.g. shares, bonds, mixed, etc). Alternatively, you can potentially place your funds in the wrapper and manage them by yourself or with an investment manager of your choosing.
What are the Benefits?
Depending on your situation, the benefits may vary, and it is recommended that anyone interested speak to a professional adviser before investing. Generally though, the potential benefits are as follows:
Tax benefits – both tax-free growth within the fund (which can have a large effect on long term growth) and upon withdrawal from the fund
Lower costs than some of the other investment options available
Ability to have the funds managed by either your own portfolio manager or by yourself (both in Israel or overseas).
Benefits and ease of passing the fund on to the next generation
Low minimum amounts for investing
What are the Potential Drawbacks?
With funds only being available after the age of 60, we normally recommend this vehicle for clients who aren’t too far away from this age, say from 50+, or clients who can leave the funds tied up for the necessary number of years.
Furthermore, some clients find the potential requirement to withdraw funds as a monthly pension restrictive. Others however, especially Olim who often don’t have much of an Israeli pension, find this one of the best aspects of this investment vehicle.
Also, this vehicle is not recommended for US citizens.
There may be additional drawbacks depending on your own personal situation, which, again, is why we recommend discussing your individual situation with a professional adviser.
What options do you have when taking your money out?
Once you reach the age of 60, the three main options are:
Leave your funds to grow tax-free until you or your heirs need them
Withdraw the funds as a tax-free monthly pension
If you already have a minimum Israeli pension of around 4,500 Shekel per month, you can withdraw the funds as a lump sum (or sums), paying only 15% capital gains tax on the real gain (as opposed to the regular 25%). If you don’t have the minimum pension then you can use the first 1m Shekel or so to buy the monthly pension and the rest you can take out as lump sums.
The above is a broad overview, and of course the suitability of this vehicle can be dependent on many factors. Therefore, anyone interested should seek advice based on their own individual circumstances.
Next time we will talk in more detail about the option to have a self-managed portfolio through this vehicle, and how this can be especially useful for Olim who have had their investment portfolios overseas for the first ten years of their Aliyah.
At Israel At Last we offer advice and assistance for setting up this type of Kupat Gemel. To learn if this is an appropriate vehicle for you and your family contact us here.