A recent bill proposed by the Israeli Finance Ministry could significantly alter the landscape of long-term savings in the country. The legislation would allow individuals to tap into their education savings accounts, known locally as "keren hishtalmut," even within the first six years, at a reduced tax rate of 15%. While the fate of this proposal remains uncertain, it sheds light on a unique savings vehicle in the Israeli financial system.
Education savings accounts in Israel function as a hybrid between a savings plan and an investment fund, available to both salaried employees and self-employed individuals. Under current regulations, these accounts enjoy capital gains tax exemptions, subject to certain contribution limits.
For employees, contribution rates are typically negotiated as part of their employment terms. The maximum allowable monthly contribution is set at 5% from the employee, matched by up to 7.5% from the employer. This structure ensures that employee contributions are at least one-third of the employer's contribution.
Self-employed individuals can also take advantage of these accounts, contributing up to 4.5% of their income, which is treated as a deductible expense. As of 2022, the annual contribution ceiling stands at 12,150 shekels, calculated as 4.5% of a 270,000-shekel income. These contributors have the flexibility to make either periodic or monthly deposits. Importantly, contributions to these accounts can also reduce the self-employed individual's taxable income for national insurance purposes.
A key feature of these education savings accounts is their status as the only equity savings instrument in Israel that offers full tax exemption, including on real gains. Profits accrued in these accounts are exempt from capital gains tax, provided the annual contribution doesn't exceed 18,960 shekels (as of 2022) and funds are withdrawn after a six-year holding period. A shorter three-year period applies if the funds are used for educational purposes.
Account holders have the option to make partial withdrawals once they reach the eligibility date. However, any partial withdrawal will render the account ineligible for further contributions. It's worth noting that there's no obligation to withdraw funds, and these accounts can serve as a component of an individual's overall retirement savings strategy.
While this information provides a general overview, it should not be considered a substitute for personalized financial advice tailored to individual circumstances.
