Israel National Savings Plan for Children (2017 )

Israel National Savings Plan for Children (2017 )
Many of our clients have contacted us with questions regarding the new savings plan from Israel National Insurance (bituach l’eumi). Below is a short description of these plans and tax reporting consequences that American citizens need to be aware of.

Starting in January 2017, Bituach Leumi will deposit 50 shekels per month into an account on behalf of children eligible for the child stipend (kitzbat yeladim). Parents can also elect to contribute an additional 50 shekels per month from the child stipend.

There are various options to choose what type of investment or savings account one prefers to invest the funds. The default option for children under the age of 15 as of 01-Jan-2017 is to be invested in a low risk investment fund (kupat gemel). The default option for children over the age of 15 as of 01-Jan-2017 is to be invested in a bank deposit with fixed interest. In addition to the default plans, one can also choose to invest in different types of savings plans through the bank or investment fund.

While the kupat gemel track is often more attractive for the larger potential of long-term growth, this can be problematic for U.S. citizens. The kupat gemel could be considered a Passive Foreign Investment Company (PFIC) and create a situation of double-taxation as well as arduous U.S. tax reporting requirements. The bank track has lower risk/return and would earn taxable interest to be reported to U.S. taxes when earned. In either case, the Israel taxation would be the Capital Gains Tax (currently 25%) of the profits at time of withdrawal.

Note that these plans are relevant to FBAR and IRS form 8938 disclosure statements for both the parents and the child. Refer to the instructions for these forms or consult with your tax professional to determine what your reporting obligations this entails.

Further reading:

From Rifka Leibowitz and her colleagues at the “Living Financially Smarter” group on Facebook : http://rifkalebowitz.com/wp-content/uploads/2016/12/Government-Savings-1.pdf

From the “Frugal and Kosher” blog: http://www.kosherfrugal.com/2016/12/bituach-leumis-new-savings-plan-for.html