Monday, December 29, 2014

We’ve Moved!

Well, I warned you that this would happen.

Investing by Accident has been rebooted, and we’ve moved to a new platform. We have a whole new website and you can find the blog at (Or, you should be able to as soon as the DNS updates.)

You should definitely check it out. I am posting Investing by Accident’s most sought after content in easy-to-find “pages.” This is good because it looks super-professional. Also, by offloading the pesky “content” to “pages,” we can keep the blog short, light and full of snark.

Looking forward to seeing you in our new place!

Wednesday, December 24, 2014

Reboot Required

I have been avoiding an uncomfortable technical matter relating to this blog. I don’t like to talk about technical matters because I am somewhat of an expert in this area.

However, we all must do things from time-to-time that we are not comfortable with, like taking our babies to tipat chalav to learn that we are truly terrible parents. Frankly, it’s amazing that they let us take our babies home afterwards.

Several loyal readers have indicated to me that they no longer get email updates when I post a new blog. I told them to do what any computer expert would tell them in this scenario: reboot your computer.

Apparently, this did not fix the problem. Of course, I knew it wouldn’t because the problem has nothing to do with their computers.

You see, “rebooting your computer” is something computer people like me tell ordinary people to do to give them time to figure out what the real issue is. Incidentally, this explains why it has been taking longer and longer to boot your computer over the years. This is being done by design to give me more time to figure out how to fix things.

In any case, while they were rebooting, I checked to see what I could do about this problem. I am an expert in this area, so I don’t think it will come as a surprise that I have no idea. However, I decided on a course of action that I think makes sense in this case: I am just going to start the blog all over again.

It’s already been a year since I launched Investing by Accident. In start-up years, that is about three decades, which makes us way overdue for an update of our strategic roadmap. 

Hopefully, the email will work this time around. If not, we can always try to reinstall. 

Wednesday, December 10, 2014

Making Me a Millionaire

As my loyal readers already know, I am a mysterious vessel of innovative ideas. At first it looks like there are only enough ideas for one start-up, but it turns out that there are enough to last all eight nights.

In this continuation of my hi-tech millionaire series, I present an open appeal to fund my new hi-tech start-up.

I believe that extraordinary innovation starts with the mundane. Through the simple observation of our everyday world, we can think of creative new ways to make our lives our better.

I am currently enjoying the relatively unique opportunity of 11 weeks of paternity leave. This has afforded me ample opportunity to engage in the everyday reality of caring for babies. Naturally, I have channeled this opportunity to develop several highly innovative ideas in baby care.

You can trust my innovations because I have a distinct advantage in the space. As the partner parent to the internet’s foremost non-expert on parenting, I have access to one of the most insightful minds in child rearing. We have engaged in countless hours of intense brainstorming sessions around my ideas. Or, we would have if we were able to hear each other over all of the crying.

Hi-Tech Babies

Let me jump right in to our flagship product: The Internet Connected Breast Milk Flow Monitor.

This innovation occurred to me while searching the internet for “how do I know if my infant is eating enough?” Judging by how quickly this came up in auto-complete, it is clear that this is an all too common question for parents of infants.

If you bottle feed, the answer to this problem is very straightforward. It’s just a matter of measuring how much you give your baby at each feeding.

However, I was very alarmed to learn that parents who breastfeed have only primitive means to answer this question. The only option is to measure your baby’s output and infer from these imprecise diaper measurements that your baby is eating enough.

We can do much better! The Internet Connected Breast Milk Flow Monitor will be able to measure exactly how much input your baby is receiving. At first, I thought we could obtain these measurements through a specially designed mouthpiece for the babies, but then I realized that it would better to design an adapter for the mothers.

The adapter is great because it will also be designed to control the rate at which the milk is dispensed. This will solve a huge problem today, as currently there is no way for mothers and babies to control the flow. Clearly, this is a problem that needs to be solved because why else do bottles come in many different “stages”?

This is a hi-tech product and the most powerful features will come from the built-in internet connectivity. We can do all sorts of things with internet connectivity that you definitely will want. For example, we can automatically post Facebook status updates on how much your baby is eating.

But even more impressively, we will be able to collect data from babies all over the world on how much they are eating. We can do almost anything with this data. For example, I’m positive that we could use it to cure ebola. If you think about it, it makes perfect sense because we are just at the beginning of the hype curve on “big data”.


I have a roadmap that includes many more innovative ideas for this hi-tech baby company, but I can’t tell you any more of them until you send me your investment. And now is definitely the time to invest. For the right price, I would even sell you the entire company.

Wednesday, December 3, 2014

Accidental Millionaires

I interrupt my normally scheduled detailed analysis of a random personal financial issue for an important message:


To my friends at Glide, who were just in the news for receiving $20 million of funding on a reported $100 million valuation. Wow!

And also, to my friends at Aorato for being acquired by Microsoft for $200 million dollars. Well done!

You’ve got to hand to these hi-tech millionaires. While the rest of us were busy writing snarky blogs about PFICs, these folks were bringing innovative new products to the world.

Who knows? Maybe they were even doing it on purpose.

As the internet’s foremost non-expert on multi-million-dollar hi-tech companies, it is only natural for me to provide a penetrating commentary on these deals. Fortunately, to guide me in my analysis, I recently received these two actual accidental questions:

#1. “How could Glide possibly need $20 million?”

This question comes from the internet’s foremost non-expert on parenting. Unfortunately, it clearly misunderstands how hi-tech companies work. I personally have visited Glide’s offices, so what I am about to say is absolutely accurate.

Glide does not have a full-time barista to make coffee for their engineers.

Shocking, I know. It’s hard to believe how far they have come while having to prepare their own coffee. Thankfully, they now have the funding to address this critical gap in their business strategy.

Glide on, Glide!

#2. “What will be the next big innovative idea that will be worth millions of dollars?”

I have pondered this question for as long as I have known up-and-coming hi-tech millionaires. I personally believe that great new ideas comes from relatively simple observations of our everyday reality.

I am currently enjoying paternity leave and my everyday reality is about babies. This has given me ample opportunity to think about clever and innovate new products in the up-and-coming field of hi-tech baby care.

As an open appeal for funding my new company, I will publish these ideas in next week’s blog. Unless, of course, someone acquires me before then. 

Wednesday, November 26, 2014

Run away! Run away!

In this exciting continuation of being wrong, I present you with the second time in the past few weeks that I have been wrong. Before last week, I would have said that my second wrong is not very surprising for a blog that does everything by accident. However, now that I am the authoritative source on American ex-pat taxation in Israel, this mistake is deeply disappointing.

Wrong #2

In Running Away from a PFIC, I concluded “that תעודות סל are a viable investment option for U.S. taxpayers, assuming that these taxpayers are comfortable with the risk that ‘viable’ could become ‘not all viable’ at any time.”

Whoops! That’s not true. Israeli ETNs are PFICs. Run away!

Amendment 16

At the time I wrote Running Away from a PFIC, I attempted to research whether there was anything in how Israeli ETNs are structured that would cause them to be different than U.S.-based ETNs. I failed at this because the prospectuses were too hard to read.

I really have no excuse for not finding this summary. It is right on the landing page for ETNso n the Israeli Security Authority’s website.

This document summarizes in plain English (or Hebrew, if you prefer it that way) the new regulations for ETNs that came into effect when the amendment was approved on November 15, 2009. Included in this change is the following:

As part of this switch, the ownership of the ETN's underlying assets will be transferred to investors, and will be in trust on their behalf by the trustee. Currently, these assets are property of the ETN issuer, and are pledged to the trustee.

If the investors in the ETN have ownership in the ETNs assets, I would say that for tax purposes this is no longer a note. Actually, it becomes almost exactly like a fund.

This may be why the summary also says the following:

Amendment 16 aims to regulate and supervise ETNs in a manner similar to the mutual fund market.

I stand corrected. Israeli ETNs are PFICs just like Israeli ETFs.

Authoritative Guidance

Unless you want to get eaten by a PFIC, you should not invest in an Israeli ETN. However, as the authoritative source on this matter, I just need to add that what I just said may still be wrong.

The summary is not a legal document. It is conceivable that the actual, legal way in which ownership of the assets is structured is not so straightforward. In that case, there may still be room to claim that Israeli ETNs are not PFICs.

Specifically, I wonder whether the ETN shareholder actually owns the underlying assets directly. Or, whether the shareholder actually owns something resembling a lien on the assets. I suspect that it could be a lien because under the new regulations, the ETN is still able to function as an ETN.

The basic structure of the ETN under the amendment is that the issuer receives an investment and is obligated to return that investment with an adjustment according to a calculated index (e.g., the S&P 500). The issuer is also obligated to hold the securities that compose this index (e.g., the stocks of the S&P 500) as the underlying assets.

In a fund, the shareholder is entitled to exactly what the underlying assets are worth. However, the ETN (even under the amendment) works a bit differently..

In the ETN, if the underlying assets are not sufficient to repay the obligation (e.g., the underlying assets happen to lag a bit behind the index), the issuer must supplement from his own funds to make up the difference. And the same in reverse. If the value of the underlying assets is more than the obligation, the issuer is entitled to keep the excess.

This important nuance leads me to suspect that the actual legal ownership arrangement between the shareholder and the issuer of the ETN is much more like a lien.

However, I cannot say for certain whether or not this is actually case. I attempted to find the text of Amendment 16, but was not able to find it anywhere. If you have a copy, please send it to me.

I also attempted – again! – to read an actual prospectus for an Israeli ETN. I got further this time, but still could not decode anything specific about the ownership arrangement that could help determine exactly how the ownership is structured.

If you happen to be someone that writes Hebrew prospectuses (or even someone who just reads them), please let me know if you see anything in there that could help us. I would absolutely love to be wrong about this again.

In the meantime, I recommend running away from Israeli ETNs.

Wednesday, November 19, 2014

I was (very) wrong… twice!

Loyal readers, I owe you a deep apology. It has been brought to my attention that I was wrong. Very wrong. Twice.

Well, I can’t say that I feel too bad. After all, you should not be taking advice from a blog that calls itself an accident. Still, we have standards to uphold.

This week and next week, I beg your forgiveness by presenting you with a complete analysis of where I was wrong.

Wrong #1

My first wrong came to me as a tremendous shock. As my loyal readers know, I regularly claim to be the internet’s foremost non-expert on financial matters. However, it turns out that I am actually the internet’s authoritative source for U.S. tax issues for ex-pats living in Israel.

I know this because my definition of a PFIC was shamelessly copied by Dan Dobry )דן דוברי( in an article he wrote about taxation issues for Israelis with U.S. citizenship.

Here is my authoritative definition of a PFIC from Getting Eaten by PFIC.

A PFIC is a semi-mythological creature that roams the earth outside of the United States of America. It seeks out American taxpayers wherever they may be living, watches carefully to see if they invest their money outside of the United States, and then eats them. It does this by levying the highest possible tax calculation on the earnings from these investments.

It tends to eat them slowly, so that at first they may not feel all that much pain. After time, they experience extreme agony.

Here is Mr. Dobry’s definition of a PFIC along with an actual Hebrew-to-English internet translation:

ה - PFIC זו חיה מטולוגית, שמטיילת ברחבי העולם מחוץ לגבולות ארה"ב. היא מחפשת את אזרחי ארה"ב איפה שהם לא גרים ומביטה על ההשקעות שלהם. אם הם משקיעים מחוץ לגבולות ארה"ב היא "אוכלת" אותם.....
היא עושה זאת באמצעות הטלת מיסים גבוהים במיוחד על ההכנסות מהשקעות אילו.
אך היא "אוכלת" אותם לאט – בהתחלה היא מעניקה את התחושה שזה לא כואב במיוחד אך עם הזמן זה הופך להיות כואב באופן קיצוני

The PFIC is an animal mythical, travel around the world outside the United States. She is looking for U.S. citizens wherever they live, and not looking at their investments. If they invest outside the United States is "eating" them… It does so by imposing very high taxes on investment income while. But she “eats” them slowly – at first it gives the impression that it was not particularly painful but over time it becomes extremely painful.

I know that Mr. Dobry is a financial expert because he is the CEO )יו"ר( of Global Investment Solutions Ltd (“איגוד המתכננים הפיננסים”). Here are his exact words from his biography:

Dan Is dedicated to finding for the Israeli Financial Institution's solutions and accumulated Knowledge.

Imitation is the highest form of flattery, and I am deeply flattered to be the internet’s authoritative source on PFICs. However, I must apologize to the internet (and to Mr. Dobry) for being somewhat misleading in Getting Eaten by a PFIC.

You see, the PFIC is not actually a mythological creature, and it does not actually roam the earth. It cannot actually eat you. It is just tax regulation which I personified as hyperbole in an attempt to provide entertainment value to my readers. Or, you could say: סתם.

Unfortunately, Mr. Dobry seems to have taken this literally. Or maybe, this is not unfortunate at all. It has provided us with a bit of accidental entertainment by juxtaposing an utterly snarky definition of a PFIC in an otherwise entirely serious article.

I am certain that he is serious because he offers practical advice for his readers to overcome U.S. taxation issues. Specifically, they should consult with an expert. He doesn’t provide a full list of who these “experts” could be. He mentions himself and then his list appears to get cut off. I suppose if he continued, I would have been on the list, but I guess we will never know.

In any case, now that I am an expert, I really should shamelessly copy-and-paste something from another expert. I found this in Mr. Dobry’s article, and it seems appropriate. I will use an internet translation engine to make sure I don’t miss anything:

כל האמור בכתבה זו אינו מהווה תחליף לייעוץ משפטי או מקצועי ובכל מקרה מומלץ לקיים התייעצות עם בעלי מקצוע מיומנים בתחום זה.

All of this article is not a substitute for legal or professional advice in any case it is recommended to hold consultations with skilled professionals in this field.

Wednesday, November 12, 2014

How to Run Away from a Keren Hishtalmut

The blog returns this week after a longer-than-expected unexpected delinquency. Fortunately, Bituah Leumi is being kind enough to sponsor 11 weeks of paternity leave which will allow me an extraordinary amount of time to ponder important financial issues while changing diapers. In fact, I plan to honor this unprecedented leave from work with a special blog in which I will share my personal tips on how to save money running your household.

But first, in this final blog about whether the Keren Hishtalmut is a PFIC, I present you with Investing by Accident’s not-at-all-proven methods for running away from the PFIC inside of your Keren Hishtalmut. Also, by a horrible act of ill-luck, you can also use the same methods to run away from the PFIC inside of your Israeli pension.

Method #1: Renounce Your Citizenship

Renouncing your U.S. citizenship is like selling your apartment and moving to a big house in a far-off place where no one wants to live in order to save a lot of money. It is really popular to talk about with your Friend, but no one actually does it.

Frankly, it would be very un-American to renounce your citizenship. I can’t even consider it because there is no one who is more American than me. Well, except perhaps for Americans who still live in America and don’t talk renouncing their citizenship on their blog.

In any case, this would only be a forward looking solution. You would still need to pay taxes for the years up until you renounce your citizenship.

Method #2: Temporary Regulations

The regulations published by the IRS are “temporary,” which is an English word that is generally used to refer to something that is not yet permanent. I’m not sure that it means the same thing in IRS-English, but the bulletin includes a contact phone number: (202) 317-6934.

I suppose you could call the number and ask them to change the regulations. Please let me know what they say.

Method #3: Update the Tax Treaty

I am already planning to speak with John Kerry about the tax treaty next time he is in the region. I will ask how he feels about designating Israeli pensions for special treatment as if they are U.S. qualified plans. If we could this, we could escape the PFIC inside of the Israeli pension plan. There is no harm in asking him if we would be open to do the same for the Keren Hishtalmut.

I will definitely let you know what he says. Until then, there is one option left.

Method #4: Deal With It

If the money in your pension or Keren Histhtalmut is a mutual fund, it is a PFIC. According to the (temporary) regulations, you will need to report it accordingly.

This means that you need to file PFIC Form 8621 form with your tax return. Your accountant will not be happy about this. Very likely, he will express his displeasure by charging you more money to complete your return.

However, there is a bright side. After you go to the trouble of filing the PFIC form, you will find that it actually makes no difference in how much tax you owe.

Tax Calculations

As you know if you didn’t use the skipping tags, there are basically three ways that you get eaten by a PFIC when you buy a regular Israeli mutual fund in an ordinary taxable investment account. As it happens, none of these is relevant when the money is invested inside of an employees’ trust like your Keren Hishtalmut or Israeli pension.

The first way that you normally get eaten by PFIC is that the only practical way to report the income is to use the mark-to-market calculation. This calculation treats all earnings the same and taxes them at your incremental income tax rate. When this happens on an ordinary “passive” investment, it costs you money because you lose out on the lower tax that you would have paid on long term capital gains and qualified dividends.

However, any investment gain inside of an employees’ trust is anyway treated as regular income. I’m not an expert, but it seems to me that it should not matter whether you report this gain directly on your tax return or via form 8621. In either case, you should add it as other income earned in connection with your employment. It is taxed at your ordinary income rate because it is not “passive,” but that’s ok because it also means that you can apply a credit for Israeli income tax paid to cover any tax you may owe.

The second way that you normally get eaten by a PFIC is that the mark-to-market calculation forces you to realize “pretend” gains (or losses) as the exchange rate between the dollar and shekel changes. The reason for this is that you report the value of a PFIC as the change in the investment value – in dollars – between January 1 and December 31. If the same money was not in a PFIC, you would still have to report interest, dividends and capital gains in dollars, but you would do this throughout the year whenever these events occurred.

Also here, it happens to be that the same thing happens anyway in an employees’ trust, even if it wasn’t in a PFIC. When you calculate the investment gain to add to your income each year, you should be using the same dollar-based calculation.

The third reason that you normally get eaten by PFIC when you invest in an Israeli mutual fund is that you will need to pay taxes to the United States on the investment gain every year, but you only need to pay taxes to Israel when you sell your investment. This could easily cause a situation of double-taxation in which you pay taxes to the United States on your investment in one year and then pay more tax on the same money to Israel in the next year.

With money in your Keren Hishtalmut, double taxation is not a concern for the simple reason that you never pay tax to Israel on this money anyway. However, interestingly (or maybe, sadly) this could be a problem with your Israeli pension in certain cases.

What’s Next?

The conclusion is that if you hold a mutual fund inside of your Keren Hishtalmut it is a PFIC. However, the irony is that this will not make a difference on your tax bill if you treat the Keren Hishtalmut as an employees’ trust.

However, I did find in my research that there are two things that may be worth considering in managing your Keren Hishtalmut and Israeli pension.

The first is that you could avoid the problem of the PFIC (at least for your Keren Hishtalmut) by moving your Keren Hishtalmut to a self-managed account. This would allow you to buy individual stocks and bonds and avoid the PFIC entirely.

You could do this. Or, you could not do this. It really doesn’t matter that much. As long as you are treating your Keren Histalmut as an employees’ trust, there is no advantage in terms of the bottom line on your tax bill. The only reason you may want to do this is for the peace of mind of knowing that no one will ever ask you to complete form 8621.

The second thing I found is very subtle, but very important. 

There is a double-edge with the Keren Hishtalmut and the Israeli pension being employees’ trusts. On the one hand, the earnings are not “passive” and you can take a credit for Israeli income tax that you paid. On the other hand, you will pay tax at the rate of ordinary income on these investments, even if some of the gain comes from dividends and long-term capital gains.

Generally, this is not at all a concern because you should have enough credit for the Israeli income tax that you paid to more than cover any tax due. However, this would change if you reach a point where the investment gains in your Keren Hishtalmut and your pension become very large (and/or your income gets very small) to the point where you actually do not have enough credit.

If this were to ever happen to you, it would make sense for you to close your Keren Hishtalmut (and to the extent that you could, your pension) and place these investments in a regular taxable investment account instead. You could then use Investing by Accident’s Tax Equilibrium Calculator to manage these investments and pay only around 25% in taxes.

As my loyal readers know, I am a bona fide non-expert. This is why I did the only thing a non-expert could possibly do in this situation. I created a spreadsheet to calculate when it would make sense to close my Keren Hishtalmut and/or take money out of my pension. The good news is that this only happens when you are rather wealthy. The bad news is that this could reasonably be the case as you get closer to retirement.

Or, maybe that isn’t bad news. After all, it would be nice to be rather wealthy.

In any case, if you would like to see the spreadsheet, email me at donny 'at' and I’ll send it to you.