Wednesday, July 23, 2014

Keren Hishtalmut: Part I

Over the years, many an accidental reader has approached me with questions about the Keren Hishtalmut. Like you, they are seeking a non-expert opinion on this popular Israeli savings mechanism from someone they know they cannot trust.

Here are all the answers, formulated in Investing by Accident’s brand new easy-to-read Q&A format.
Q. I’ve seen it written that that the Keren Hishtalmut is the best thing sincesliced pita. Is this true? 

A. Yes.

Q. Personally, I think that “best thing since sliced pita” is an awkward mixed metaphor because there is no such thing as sliced pita. Even if there was such a thing, it doesn’t sounds like it would be so good. If you are trying to find a clever Israeli alternative for “best thing since sliced bread,” what do you think about, “best thing since frozen schnitzel”? It isn’t sliced, but it is a great invention.

A. I agree. My children love the frozen schnitzel.                          

Q. Why is it so good?

A. Well, it’s schnitzel that is ready for you to eat whenever you want it. All you need to do is heat it up.

Q. I mean, why is the Keren Hishtalmut so good?

A. With a Keren Hishtalmut, you can put money in a fund that grows tax free, and after 6 years you can withdraw the money and not pay any Israeli tax on it. The deposits and the gains are free from Israeli income tax.

Q. That sounds great! What about the money that I contribute to the Keren Hishtamut after year 6?

A. The Keren Hishtalmut is “unlocked” after 6 years. Even money you put in in years 7, 8 and 9 (and later) can be taken out without paying Israeli tax. However, once you withdraw, the 6 year “locking period” will reset.

Q. What about investment income that accrues in the account after 6 years?

A. Same thing. This money is free from Israeli income tax when you withdraw it from the account any time after 6 years.

Q. That sounds absolutely awesome. Can I put all my money into a Keren Hishtalmut?

A. No, of course not. There are limits.

Q. What are the limits?

A. To find the limits, you can simply read the לוח עזר לחישוב מס הכנסה ממשכורת ושכר עבודה which the Israeli Department of Taxation conveniently publishes every year, but which is surprisingly difficult to find.

Or, I could just tell you.

The limits are slightly different if your Keren Hishtalmut deductions are made through your employer or if you are making them yourself from your self-employed income.

Through your employer, you can contribute up to 2.5% of the first 15,712 shekel of your salary per month. Your employer can match your contribution up to three times, or up to 7.5%. This brings the yearly limit to 10% of 15,712 shekel per month, or 18,854 shekel per year.

If you are self-employed, you can contribute up to 18,480 shekel per year into your Keren Hishtalmut. Of this amount, only 11,880 (or, up to 4.5% of your salary, whichever is lower) can be reduced from your Israeli income for income tax purposes.

The limits are adjusted every year, so be sure to search the latest “לוח” every year. Also, it should be obvious, but I love the obvious: if you don’t make any money, then you can’t put anything into a Keren Hishtalmut.

Q. It is weird to me that the limits are different by so little between contributions made through employers versus those made by people who are self employed: 18,854 shekel versus 18,480 shekel. If they are already that close, why not just make them the same?

A. That would make sense, but it wouldn’t give us the opportunity to find clever uses of the Keren Hishtalmut for the self employed that we could write about on our blogs, would it?

Q. I guess not… but who is asking the questions here?

A. You are. That was an answer.

Q. I have many more questions, but we’re out of space in this blog. Would it be alright if I continuing asking questions next week?

A. Of course. That’s why I called this, “Part I.”


  1. if you work in Ramallah for Microsoft, do you still get the hishtalmut?

  2. do people working in Gaza get the same benefit?

    1. You have to be working legally in Israel to be eligible for the Keren Hishtalmut. It would be great to see this kind of savings plan available in other jurisdictions in the world, especially those places that want/need to encourage individuals to save more for the future.

    2. So anyone that has a job in Gaza city is working illegally? They have to escape Gaza through a tunnel to get a legal job? I do not understand.

  3. Are the Microsoft employees in Ramallah eligible for hishtalmut as well? they must be legal since they work for Microsoft, right?

    1. I do not know about any particular employer-employee status (except for my own), but something like the Keren Hishtalmut would only be relevant for Israelis with taxpaying status. The PA should have its own financial system in terms of individual savings programs for its residents; although, I couldn't find any information on this.

  4. are you researching this topic?

  5. Maybe he plans to answer these questions in part II