Keren Hishtalmut
What is a Keren Hishtalmut?
Keren Hishtalmut is a six year (almost) tax-free savings and investment plan available to people who work (whether employed or self-employed). If you are employed, this may be a benefit your employer offers you. This is a work benefit, as the employee generally pays in 2.5% of their salary and the other 7.5 % is an “extra” from your employer above the gross salary you agreed upon.
If you are self-employed, you can deposit up to 7% (but the first 2.5% are not tax-deductible).
Why is it financially smarter to have a Keren Hishtalmut?
The first reason is that returns on these plans are generally good, although it’s important to keep in mind that past performance does not guarantee future performance.
The second reason is that it reduces your payments to Income tax and Bituach Leumi (Israeli Social Security).
Employers often prefer to pay Keren Hishtalmut instead of raising your salary, so this is another way to make more money. It’s basically free money from your employer!
Lastly, there is no capital gains tax on a Keren Hishtalmut. With capital gains tax at 25% of profits, this is a huge savings, which makes it financially smarter than taking a higher salary and paying taxes on that money. For example, if you have 100,000 NIS in a Keren Hishtalmut that made 30,000 NIS over 6 years, you don’t pay the 7,500 NIS of capital gains tax you would have paid if it was a mutual fund or other such investment. Plus, you got a tax benefit when you deposited.
How do I get a Keren Hishtalmut?
Not every employer offers Keren Hishtalmut, and among those that do it isn’t always offered upfront. When you negotiate your salary, ask if Keren Hishtalmut is included above the salary they are offering. If you do get offered a Keren Hishtalmut, you will need to open one. Your employer will often connect you with their insurance agent for that purpose, but you are free to choose a different agent.
If you’re self-employed, you open your own Keren Hishtalmut through an insurance agent and deposit a set amount each month into the fund or deposit a large amount at the end of each year. We recommend setting up a monthly auto pay.
How much should I be depositing in my Keren Hishtalmut?
If you are employed, the total that can be deposited is a percentage up to 10% of your income. You get a tax break on the deposit, and the capital gains (your profit) are tax-free when withdrawn.
The maximum that a self-employed person can deposit is 4.5% of their annual income on income of up to 264,000 NIS per year. You can’t deposit more than 4.5% of 264,000 even if you earn more.
It is financially smarter to try to maximize your contribution each year, based on your income figures (speak to your accountant or tax adviser, I can’t help you with this). It may even be worth taking a loan to deposit in the Keren Hishtalmut – the interest will be low, and it will be more than covered by the immediate tax benefit.
How do I know which fund to choose?
You get to choose any fund you’d like. A licensed agent can help you make an informed decision. You can look up and compare all the funds on the Ministry of Finance website.
If you have a fund but do not know where it is, find it here.
When can I withdraw funds from my Keren Hishtalmut?
You can withdraw funds from the Keren Hishtalmut after 3 years for certain educational purposes – professional conference fees or similar, or after 6 years for any purpose.
Although your funds can be withdrawn after that time period, if you leave them they will continue to grow and remain free from capital gains tax, so it is not necessarily financially smarter to withdraw them. In fact, some Keren Hishtalmut management companies can offer you a loan against the Keren Hishtalmut (conditions apply) with a far lower interest rate than the average Keren Hishtalmut return, so this could be an option for someone with money in the fund who needs the money for some reason and can afford to pay it back in installments.
Any time after the 6 years, when the fund is open, you can withdraw via a form on the company’s website, and you should receive your money in your bank account within approximately 7 business days.
Disclaimer: Numbers and details are correct as of March 2020, but can change at any point. We can’t take responsibility for accuracy, so use this page as a guideline only. Consult with an insurance agent and/or accountant before investing in a Keren Hishtalmut. If you are American, please consult with your CPA.