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.

Tuesday, October 7, 2014

More Americans!

Wow! Just in time to read the answer on whether a Keren Hishtalmut is a PFIC, two more Americans have joined the family.

Actually, these new ones are technically not yet American. For now, they are only Israeli. However, I’m assuming that they won’t read these blogs in time, and will have their U.S. passports before realizing what they got themselves into.

The news was just broken on the internet’s foremost source for Pro-Parenting Tips. For example, Pro-Parenting Tip #816: if you always answer “no” to questions without listening to them, be careful to time it correctly so that your children do not notice. Otherwise, they will outsmart you by asking their questions in the negative.

In any case, time to change a diaper or two. Investing by Accident is on vacation on purpose for Sukkot and returns acharei hachag with the exciting conclusion on how to minimize the impact of getting eaten by a PFIC in your Keren Hishtalmut.

Wednesday, October 1, 2014

PFICs in the Keren Hishtalmut

In my non-expert assessment, I’m inclined to say that the Keren Hishtalmut and the Israeli pension are both employees’ trusts. This brings us to the question of what happens if the money inside of the Keren Hishtalmut or pension is invested in a PFIC.

Escaping the PFIC?

On the one hand, I would like say that the structure of the Keren Hishtalmut or pension shelters the investments inside of the account in such a way that it longer matters what the investments are.

The conceptual support for this approach comes from the way we are reporting the investment gains for tax purposes. We are taking the gains as income each year (and not as passive income), regardless of what the gain was from (interest, capital gains or dividends). It is almost as if the “trust” obfuscates the investments such that we no longer care if the underlying invest is a PFIC.

This is a nice line of thinking and it makes me happy to think about the world this way. However, does it have a basis in the tax regulations?

I think until recently this was the case. However, since December 2013, we can no longer use this reasoning.

[Begin Skipping]

IRS Regulations on PFIC Ownership
Last December, the IRS published temporary regulations to specify exactly when the underlying investments in a trust require PFIC treatment and when they do not. 

Here is what it says about foreign pensions:

Foreign pension funds. A United States person that is treated as the owner of any portion of a trust … that owns, directly or indirectly, any interest in a PFIC is not required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to the PFIC if the foreign trust is a foreign pension fund … operated principally to provide pension or retirement benefits, and, pursuant to an income tax convention to which the United States is a party, income earned by the pension fund may be taxed as the income of the owner of the trust only when and to the extent the income is paid to, or for the benefit of, the owner.

I really want this to mean that an Israeli pension which holds a foreign mutual fund would not have to deal with a PFIC. However, that is not what it says. The get-out-of-PFIC-free card only works for a foreign pension that is treated like a qualified plan according to a tax treaty. In that case, the foreign pension would have the same status as a U.S. qualified plan in which any PFICs held within the plan are obfuscated by the trust and do not require any special treatment.

The Israeli pension is not covered in a tax treaty. Instead, like a Keren Hishtalmut, it is an employees’ trust. This is a type of nongrantor trust. You know this is the right term because you eat potato berukas.
In that case, the following paragraph applies to the Keren Hishtalmut and to the Israeli pension:

Estates and nongrantor trusts. If a foreign or domestic estate or nongrantor trust … directly or indirectly owns stock, each beneficiary of the estate or trust is considered to own a proportionate amount of such stock.

[End Skipping]

When you have a Keren Hishtalmut or the Israeli pension, you are the “beneficiary” of the trust. The IRS regulations published in December 2013 state that in this case you are “considered to own a proportionate amount” of any of the stock in the trust. If the stock is a foreign mutual fund, it means you have ownership in a PFIC and are required to file form 8621.

What Now?

The bad news is that in my non-expert opinion, you cannot escape a PFIC with a Keren Hishtalmut or an Israeli pension.

However, the good news is that since this PFIC is inside of an employees’ trust, its impact will be minimized. Next week, I explain the options for dealing with this PFIC.

Wednesday, September 17, 2014

Keren Hishtalmut U.S. Tax Treatment: Part II

Last week, I presented the case that the Keren Hishtalmut – like an Israeli pension – would be treated like an employees’ trust for U.S. tax purposes. This week, I ask several non-expert questions about this.

[Begin Skipping]

1. Is a Keren Hishtalmut really an employees’ trust?

My first question is whether the Keren Hishtalmut can really be considered an employees’ trust. After all, the employee has complete control over it. To be a “trust,” wouldn’t it need to be administered by the employer?

Admittedly, this question is somewhat silly considering that we made up the criteria for what constitutes an employees’ trust in the first place. However, we are having so much fun that we should think about this.

If you think that the Keren Hishtalmut is not an employees’ trust, then you would probably have to say the same thing about an Israeli pension. In both cases, the employee has complete control over the investments and the plans are not administered by the employer.

Perhaps you would argue that a pension is different because it has a set of clear and strict government regulations which make it more “trust-like.” However, if you did that, I would argue that the Keren Hishtalmut has an equally clear and strict set of government regulations.

The only way I could see that a distinction could be made between the Keren Hishtalmut and the pension would be if the IRS would explicitly rule them to be different. Or, perhaps more reasonably, if Israel and the United States were to update the tax treaty to explicitly treat them differently.

Updating the tax treaty to address Israeli pensions would be very nice and make sense. I personally volunteer to speak with John Kerry about this next time he is in the area. My recommendation will be that Israeli pensions should be treated like qualified retirement plans, and that Keren Hishtalmut would be treated explicitly like an employees’ trust.

2. Employees’ trust for the self-employed?

My second question is that assuming an Israeli pension and Keren Hishtalmut would be considered employees’ trust, could this also extend to the same plans set up by someone who is self-employed? In that case the employee is the owner.

Can you set up an employees’ trust for yourself?

I wouldn’t think so.

Fortunately, no one cares what I think. The answer should be “yes” because Section 402(i) specifically allows this.

3. Are the first 6 years different?

Does it make any difference that withdrawals are allowed from the Keren Hishtalmut after 3 years for educational purposes, or after 6 years for any reason?

Although this sounds like an important criteria that should somehow factor into our tax treatment, I can’t think of any tangible reason why this makes a difference.

It may sound relevant because it seems similar to “vesting.” In an employee’s trust, the contributions and earnings are taken into income only once they belong to the employee. You may want to say that this happens only after the Keren Hishtalmut “unlocks” after 6 years. However, I do not think this is correct.

In a Keren Hishtalmut, the money is yours the moment it is deposited. The limitation on withdrawal from the Keren Hishtalmut prior to 6 years is only an Israeli tax consequence. You could withdraw money early; you would just need to pay tax on it.

The vesting component for employees’ trust may applying to severance pay, but that is a separate question. Fortunately, no one has accidently asked me that question so I don’t need to answer it.

4. What about the fact that the Keren Hishtalmut is exempt from FATCA reporting?

Finally, is the fact the Keren Hishtalmut is exempt from FATCA reporting have any impact on this question?

Like the 6 years, this also sounds like it should somehow factor into our tax treatment. However, I don’t think it does.

Specially, the IRS regulations for FATCA in 1.1471-5 (b)(2)(i) allows exemptions from reporting for (A) foreign “retirement and pension accounts,” and (B) foreign tax-advantaged “non-retirement savings accounts.”

For (B), the regulations exempt accounts that are “tax-favored with regard to the jurisdiction in which the account is maintained, subject to government regulation as a savings vehicle for purposes other than for retirement.” There are several conditions that must be met to qualify for this exemption, and I believe the Keren Hishtalmut meets all of them.

This is a very nice bit of accidental research which explains why your Keren Hishtalmut provider never asked you to fill out a W9 form. However, I do not think there is any reason why this would have an impact on how the contributions and the earnings in the account should be treated for U.S. tax purposes.

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I am now convinced that the Keren Hishtalmut can be treated as an employees’ trust. This brings us to the critical question regarding PFICs.

If the money in the employees’ trust is invested in a foreign mutual fund, does it need to be reported as a PFIC or not? 

Wednesday, September 10, 2014

Keren Hishtalmut U.S. Tax Treatment: Part I

Accidental readers everywhere want to know whether or not they will get eaten by PFIC if they have a Keren Hishtalmut.

It is important to keep in mind that this is an important tax issue, which means that you shouldn’t listen to anything you read by accident on a blog. Instead, you should ask your accountant for guidance.

Unless you don’t like what your accountant has to say on the topic. In that case, you should do exactly what you would do if you wanted an answer from your rabbi. Keep asking until you get the answer you want. When you find it, please post it in the comments so that we can all take part.

And that is how it came to be that no one visiting Israel observes two days of chag.

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Keren Hishtalmut as a Brokerage Account

If we didn’t know any better, we would just assume that a Keren Hishtalmut is no different than a regular brokerage account.

The logic behind this way of thinking would be that although the Keren Hishtalmut has special tax treatment in Israel, that doesn’t mean anything for U.S. taxes. The only way it would be different is if there was a special agreement in the tax treaty between the United States and Israel. There isn’t.

This a very simple and clean way to think about the Keren Hishtalmut, but I don’t like it very much. It would mean that you will get eaten completely by PFIC if you own a mutual fund in your Keren Hishtalmut. I have a Keren Hishtalmut and I don’t want to get eaten.

Keren Hishtalmut like a Pension

For us to avoid (or, lessen the impact of) the PFIC, we need find an alternative tax treatment for the Keren Hishtalmut. To do this, we simply need to read the U.S. tax code and find something that sounds similar enough to a Keren Hishtalmut that is more favorable. Our best option in this regard is to treat the Keren Hishtalmut the same way that we would treat an Israeli pension plan.

Foreign Pensions

In the U.S., pension plans have special tax treatment. For example, if you have a 401(k) plan in the U.S., you and your employer can make contributions into the plan which are tax deductible. You also do not pay any tax on the gains inside of the 401(k) each year. Rather, you will pay income tax when you withdraw the money, either at retirement age or earlier under special conditions.

This special tax treatment is only available to “qualified plans” that meet the requirements of section 401(a).

One of these requirements is that the plan is created in the United States. If you were an expert, you could easily conclude that this means that foreign pension plans are automatically not qualified.

However, if you were not an expert, you would know that according to 402(d), foreign plans can still be qualified, provided that they meet all of the requirements of 401(a). Unfortunately, not being an expert in this case will not get you very far. If you don’t believe me, read 401(a) and use it to determine whether your Israeli pension plan meets these requirements. (Hint: it will not. The ability to withdraw the severance pay component from the pension would break the rules. Also, the Israeli pension will fail to meet the requirement of rollover to other eligible plans.)

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The only way you will be able to convince your accountant to treat your foreign pension plan as a qualified retirement plan would be to show him that there is a special arrangement made in a tax treaty. This will not work for Israel. As with most countries, the United States does not have a special provision with Israel to allow pension plans to be treated as if they are qualified.

However, it will be very easy to convince your accountant to observe only one day of chag, especially if he already lives in Israel.

For foreign pension plans that do not have special treatment under a tax treaty, the common understanding is that they should be treated the same way a non-qualified plan would be treated in the United States. Plans like these in the United States are called, “employees’ trusts.”

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A trust may not be qualified for special tax treatment for any number of reasons. For example, employers may set aside money in a supplementary retirement savings that exceeds the contribution limits for qualified retirement plans. Or, an employer may set aside money in special incentive plan that vests over many years in a type of deferred compensation plan.

In the case of one of these non-qualified plan, you can read section 402(b) to learn how the tax is assessed. Or, I could just tell you that the contributions and gains (as soon as they are “vested”) are considered taxable income each year.

The regulations never state explicitly how a plan must be structured to be considered an employee’s trust. However, we can imply a lot from various IRS rulings on the topic and from random searches that I have done on the internet. Basically, it would need to be at least that, (a) the employer contributions to the plan are greater than the employee’s, and (b) that the plan is only available through an employer.

The first requirement is very important because otherwise the trust would have entirely different properties. In the case where the employee puts in all of the money (or most of it), the trust would a “grantor trust.” In that case, you directly own the trust and a whole set of other tax consequences would apply. The most significant would the requirement to report your ownership in a foreign trust using Forms 3520 and 3520-A.

In the case of an employees’ trust you should think of this as precisely not a “grantor trust.” Or, you could say that an employees’ trust is a type of “nongrantor trust.”

I suppose that there could be other types of nongrantor trusts as well. If that sounds confusing to you, just think of it like a potato pastry. All potato pastries are knishes, but not all knishes are filled with potato.

Or, maybe the potato pastry could also be a bereka. Well, either way, I think my point is clear.

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In practice, treating your Israeli pension as an employees’ trust would mean that in any year, all of your contributions and your employer’s contributions would be considered taxable income. Also, any increase in value in your pension would be considered taxable income.

The good news is that because this money came through your employment – and is in an employees’ trust – this income is not passive income. This means you can apply a credit for income tax that you paid to Israel to cover any tax due on your U.S. return for this money.

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Keren Hishtalmut

Treating a Keren Hishtalmut like an Israeli pension is a rather natural extension. The only practical difference between them in the way they are structured is that the pension restricts distributions until retirement age (or, in the case of severance pay, to termination from employment). This sounds like it may be significant, but it really isn’t. The tax treatment for the Israeli pension plan had nothing to do with the fact that it is a retirement account. It is based on the account being an employees’ trust.

Like an Israeli pension, the Keren Hishtalmut could be a considered an employees’ trust because (a) the employer contributions to the plan are greater than the employee’s, and (b) the plan is only available through an employer.

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If so, the tax treatment for the Keren Hishtalmut would be the same as a pension. In each year, the contributions (yours and your employer’s) would be considered taxable income. Likewise, any increases in the value of the Keren Hishtalmut would be considered taxable income.

Also in this case, because the income is related to your employment, it would not be considered passive. You could happily apply a credit for income tax that you paid to Israel to cover any taxes due to the United States.


Treating the Keren Hishtalmut and the pension as employees’ trusts is fairly well established in the accounting business. However, I am not fairly well-established in the accounting business. I have several questions on this that I will ask next week.

Wednesday, September 3, 2014

Running Away from a Keren Hishtalmut?

It may be somewhat of surprise to you, but it’s true: Getting Eaten by PFIC is far and away Investing by Accident’s most popular blog.

Or, maybe that isn’t at all surprising. It is consistent with Investing by Accident being #1 in the internet search results for “pfic israel keren hishtalmut.”

Unfortunately, this significant internet achievement brings me to a challenge of conscious. In Getting Eaten by PFIC, I contended that a Keren Hishtalmut is not a PFIC, but I never explained why. It turns out that my contention was so contentious, that one Accidental Reader contacted me to ask me about it.

Ordinarily, I would refuse to answer his question because he asked it on purpose. However, I was so impressed that he was willing to drive all the way from Jerusalem to meet me that I am making an exception.

Also, I think I was wrong and need to set the record straight.

Is a Keren Hishtalmut a PFIC?

I have pondered this question for at least as long as it was asked to me, and in my estimation there are exactly three ways that you could go about answering it.

1. Your first option is to completely ignore the question.

In my non-expert observation, most people choose this path by accident. You probably just decided to do this. You assume that your accountant will handle this for you. In a worst case scenario when the IRS starts asking you questions, you could just say that you only read as far as this sentence in my blog.

Unfortunately, you no longer have any excuses because you can read my blog using the Skipping Tags. You will enjoy a good amount skipping, as it will take many blog postings to fully deal with this question.

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2. Your second option would be to search the internet to find someone who has already posted an answer to this question. Unfortunately, this will not work because no one has done this. In fact, if you decide to take this path, you will just end up right back at this blog where you started.

3. Your third option is to perform your own non-expert research on the topic. While this sounds like an extremely daunting task, it is really only very daunting. I have already performed this research and can provide you with a simple, short list of resources for you to use in your own research.

Do-It-Yourself Non-Expert Research

Here is what you’ll need:

Tax Treaty. It is always a good idea to begin research on any topic by reviewing a tax treaty. For example, when I need to find a creative new recipe to entertain guests, I always start by checking if there is an article in the tax treaty that may be relevant.

The tax treaty between the U.S. and Israel is available from the IRS website. Be sure not to miss the “savings clause” in Article 6, paragraph 3, which may mean that you do not need to read the treaty at all. No one knows when the United States will invoke it, and most people assume that they always will.

But if the savings clause is always invoked, then why is there a tax treaty in the first place? This is a good question with no answer. Perhaps it exists to provide a place to keep the personal correspondence from Jimmy Carter.

401’s. You will want brush up on Section 401 of the tax code, which talks about the special tax treatment for qualified retirement plans. As an alternative, you could just check the balance in your 401(k). It is about equally as understandable.

402’s. After finishing 401, you should read section 402, especially part (b). This is the section that talks about the taxation of plans that are not qualified. Or, since it is more-or-less the inverse of section 401, you could just look at your 401(k) statement in the mirror.

In any case, while you are in the 402’s, it is worthwhile to take a look at parts (d) and (i) as well.

FATCA. You can read the proposed regulations from the IRS on when foreign financial institutions are required under FATCA to report accounts held by Americans.

Or, you could not read it. It really doesn’t make a difference.

It sounds like FATCA should be relevant to the question of whether a Keren Hishtalmut is a PFIC, but it isn’t. However, it will explain why your Keren Hishtalmut provider has never asked you to complete a W9 form. That isn’t what you are researching, but it never hurts to learn things by accident.

Comparisons. The best part of your research will be finding other types of foreign accounts that are similar to the Keren Hishtalmut and compare how they are taxed by the United States.

Actually, this isn’t true because you won’t find any. 

But that is ok, because this part is more about the journey than the destination.

A good place to start would be in this blog about the Tax Implications of Foreign Pension Plan Participation.

You will want to look up his sources, including reading up on a Registered Retirement Savings Plan in Canada. This one is especially fun because you can then read about it in Article 18 of the tax treaty between the United States and Canada. Who knows? Maybe they also have a create way to make chicken with maple syrup.

Whatever happens in your research, make sure not to miss the Individual Savings Account (ISA) from the U.K. This one is an especially good treat because you can read this blog about whether an ISA is a PFIC which is so good that it may as well have been written by a non-expert.

To finish it off, I recommend this scholarly-sounding piece that talks about the Singapore Central Provident Fund.

YouTube. Next, you will want to watch this video about what really motivates us. This has nothing at all to do with taxation of the Keren Hishtalmut. I am just testing to see if you are still reading this blog. Also, I think it is great how they draw words and pictures with the voice over. When I grow up, I want to make videos like this.
IRS Regulations. Finally, you should read the IRS regulations on what constitutes ownership in a PFIC. I suppose that you could have just started and finished with this and skipped all of the other research. But, what kind of journey would that have been?

Is the Keren Hishtalmut a PFIC?

What will all of this non-expert research tell you about whether the Keren Hishtalmut is a PFIC?

There is no way for you to know for sure without doing the research. Actually, there is. I could tell you because I did the research.

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The answer about whether the mutual fund holdings in a Keren Hishtalmut would be considered a PFIC is:

I think so.

I’m sorry. I know this isn’t the answer you were looking for.

However, the good news is that I do not believe you will get eaten by this PFIC in the same way as you would in a regular brokerage account. In the weeks ahead, I’ll explain why.