Keren Hishtalmut: Part III

Q. Many alert readers have posted comments about tunnels in response to your blogs about the Keren Hishtalmut. I assume they want to accidentally ask you: how would you compare the Keren Hishtalmut to terror tunnels?

A. The Keren Hishtalmut is far more prevalent than terror tunnels, yet it is far less likely to get destroyed by the IDF. In fact, you can read some great statistics on the Keren Hishtalmut on the Israeli treasury department’s website. For example:

• At the end of 2012, there were 120 funds holding a total of 127 billion shekel in Keronot Hishtalmut
• Of this, 16.3 billion were new deposits in 2012. 
• The cost in lost tax revenue from the Keronot Hishtalmut for 2014 is estimated to be 5.8 billion shekel.

This is a lot of money, but I doubt the Israeli government would want to cancel the program. Or, maybe it’s more like, “I am hoping they won’t.” Either way, a program that succeeds in encouraging individual savings is great for the economy and hard to recreate if cancelled or inhibited.

Q. If I am self-employed and want to start saving money, would the Keren Hishtalmut be the best way; or, should I start a pension?

A. If you plan to save 18,480 shekel per year or less, it would be easiest to just use a Keren Hishtalmut. The pension is more complicated and less flexible, but would make sense if you want to save more than 18,480 per year.

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Both a pension and a Keren Hishtalmut will provide you a tax efficient way to save money. The main advantage of the Keren Hishtalmut is that even if you are saving strictly for retirement that is many years in the future, you could take out the money after 6 years if you need it. Also, the money that you withdraw from the Keren Hishtalmut will be free of Israeli taxes; whereas, you will have to pay income tax on the money you receive from a pension.

                                                   

However, you are limited on the amount you can deposit in the Keren Hishtalmut, currently 18,480 per year. If you want to save more and your time horizon is retirement age, it may be a good idea to open a pension.

The pension also has other benefits that may be interesting to you, including death and disability insurance. These are automatically included in the pension, and you will pay an upfront load (2.0-2.5%) on every deposit to cover the cost of these insurances. This fee is hefty, but you will pay much lower ongoing management fees (0.25-0.5%) which will make everything even out well enough over 10 years or longer. The other major consideration for a pension is that you will need to make regular monthly deposits or the insurance benefits will lapse.

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Q. You said that the limit for contributions for a self-employed Keren Hishtalmut is 18,480 shekel per year. As an employee, the limit would be 7.5% of your monthly income up to 15,712, which comes out to 18,854 shekel per year. It’s odd that you write about the limits differently. Is there anything I could deduce from this?

A. Yes. In fact, you may have accidentally noticed that the way the Israeli tax law is written, if you are self-employed you could contribute up to 18,480 shekel into your Keren Hishtalmut, regardless of how much money you earn. The only “catch” is how much of your yearly contribution is tax deductible. This is limited to 11,880, or to 4.5% of your income, whichever is lower.

This is clever because it means that someone who is self-employed and only makes 10,000 shekel during the year, could still contribute 18,480 into his Keren Hishtalmut. Of the 18,480, only 450 shekel would deductible from income tax.

Q. Wow! That is an incredible accidental tax loophole. Why does it exist?

A. I don’t know because I am not an expert. However, I would guess that it would otherwise be very hard to administer the Keren Hishtalmut for the self-employed.

In Israel, taxes are assessed by the financial institution. For those who are employed, Keren Hishtalmut contributes are made through payroll deductions which make it very easy for the Keren Hishtalmut provider to keep track of the limits. For the self-employed, the money can be deposited at any time during the year and it would be very cumbersome for the Keren Hishtalmut provider to collect different information on each self-employed contributor as to exactly how much revenue each one made during the year.

But, I wouldn’t know. I’m just guessing.

                                                                         

Q. This sounds terrific. Thank you for all of the information about the Keren Hishtalmut.

A. You’re welcome.

Q. Oh! Wait a minute! I just realized something. If the money in a Keren Hishtalmut is invested in a mutual fund, won’t this mean that if I have a Keren Hishtalmut I will get eaten by a PFIC?

A. Wow, you are very alert reader. You even read the parts of Getting Eaten by a PFIC that you could have skipped. I am very impressed.

Q. You are such an outstanding writer than even the boring parts are exciting

A. Thank you. Flattery will get you everywhere with me. I am so impressed with this question that I will devote an entire blog to it after I return from my summer vacation in September.

Q. You could call your posting, “Running Away from a Keren Hishtalmut?”

A. I like it! It was especially clever how you ended your statement with a question.