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.


  1. not the answer I was looking for

    1. So it goes. But there is some hope even still. Stay tuned.

  2. I can not hesitate to ask: why not renounce? your USA citizenship and this problem goes away?

  3. You are Israeli now. I thought you made Aliyah?

    1. No one is more of an American Israeli than me. Prick me and I bleed red, white, blue and white.

  4. Donny,

    I assume that you are going to say that a Keren Hishtalmut is not taxed until a withdrawal is made, because a KH is a Section 402(b) plan. However, even if it is a Section 402(b) plan, that is true only for the first 6 years. After that point, you can take out money whenever you wish, which means that it is effectively your money (under the tax doctrine of "constructive receipt"). And any new money that enters a 6 year old Keren Hishtalmut can be withdrawn at any time.

    Mark Moshe Feldman
    US tax attorney resident in Israel

    1. I think "yes" and "no". I think the Keren Hishtalmut is just like an Israeli pension and should be treated as a 402(b) plan. I don't think the 6 years make a difference for "constructive receipt". The money absolutely belongs to the employee as soon as it is deposited and he could withdraw at any time -- even before 6 years are up. In that case, he will have Israeli tax consequences which makes the withdrawal not financially advisable, but it his money and he could do it. In any case, I think as long as the money is in the KH it is inside of the 402(b) plan (just like the Israeli pension) and should be treated as such. More on this on the next blog.

  5. any answers to the questions on the previous blog posting?