Your Taxes: Withdrawals from savings - opinion

The war has made amending pension and study fund (Keren Hishtalmut) arrangements necessary, as some people need to make late savings contributions, and others need to cash in savings

Pension or study fund late contributions:

On July 28, 2024, an amendment to the Income Tax Ordinance (Amendment 273) was passed. The amendment generally allows backdating to 2023 of study fund (Keren Hishtalmut) or pension fund contributions made as a freelancer in 2024 if the taxpayer or his/her spouse served on IDF reserve duty from October 7 to December 31, 2023. The backdating is generally done by instructing the pension or study fund accordingly.

Study fund early withdrawals:

On August 4, the Israeli government cabinet approved a draft bill allowing savers to withdraw savings early from a study fund at low tax rates of up to 15%.

The bill still has to be passed by the Knesset, presumably after its summer recess.

Current situation:

Currently, study funds are tax efficient in several ways, provided the money stays invested for at least 6 years generally or 3 years if actually used for study. In the case of employment, the employer typically contributes 7.5% of gross salary, and the employee 2,5% up to prescribed limits.

The employer deducts his cost for tax purposes, and the employee is exempt and can use the money for any purpose if no withdrawals are made for 6 years.

A similar study fund arrangement is available to freelancers (self-employed)—they can contribute 7% and deduct 4.5% as expenses within prescribed limits.

The investment gains generated by the fund are also exempt if the 3-6-year investment term and other conditions are met. Around NIS 368 billion are reportedly held in study funds.

Proposals:

Because of the war, business revenues are down. Some Israelis cannot wait until the end of 6 years to cover ordinary living costs. So, it is proposed to reduce the tax rate on amounts withdrawn by individuals by the end of 2024

The proposed tax rate would be set using a sliding scale of tax rates ranging from 0% to 15% (7.5% for individuals over retirement age) on amounts withdrawn, the lowest rates being intended for withdrawals closest to 6 years after the fund was opened.

After that, it is proposed that no more contributions may be paid into that study fund.

Comments:

As currently drafted, the reduced tax rate proposed for early study fund withdrawals may be a raw deal - up to 15% tax on all early withdrawals from a study fund, both income and capital. For example, suppose NIS 100K that was deposited in a study fund grows to NIS 120,000 and is then withdrawn early, in full. It appears NIS 120,000 may be taxed at a reduced rate, not just NIS 20,000.

Once the Knesset recess finishes at the end of October, it remains to be seen what will be enacted and when.

Tax-efficient amendment 190 funds:

Regardless of the war, in addition to pension funds, consider making use of a “Tikun 190” plan (under Amendment 190 of the Income Tax Ordinance). It allows Israeli residents to invest lump sums into a tax wrapper that grants deferral of taxes or even full exemption. Generally, the Israeli tax rate is 15% of income (not capital) for lump sum withdrawals and as low as 0% if you take an annuity. The Tikun 190 plan is intended to serve as a retirement top-up.

There is no minimum investment amount, but various conditions apply. Investments typically include traditional assets such as stocks and bonds. Furthermore, there is a version of the plan that allows for investment in assets such as real estate, credit funds, private equity, etc.

As always, consult experienced tax and financial advisors in each country at an early stage in specific cases.Leon@hcat.co

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.