Chasing the Fionist Dream

Do you have a keren hishtalmut? If you do, mazal tov on having access to the #1 best investment vehicle in Israel! Consider yourself fortunate. And if you don’t have one, try to get one. Ask for one in your next annual review or find a job that offers one.

But first, let’s clarify – what is a keren hishtalmut? A keren hishtalmut (“study fund” would be a loose translation) used to be just for teachers. It enables them to save and invest over the course of six years in order to fund their sabbatical year. Thankfully this program is no longer limited to teachers and has been become a nice perk that employers can give their employees – though it tends to be more common in some sectors than others.

Why is it so great? Because it is TAX FREE. On both ends! If only all of our investments had such great terms. When we invest on our own, we earn money at our jobs, pay income tax on it, and then invest money from our net (post tax) income. Any dividends or realized gains are subject to capital gains tax, so we pay tax again. Not so for a keren hishtalmut! Each month, you deposit 2.5% of your gross salary into your KH while your employer deposits an additional 7.5% (totaling 10% of your gross salary). In most places, your combined deposit is capped at 1,571 shekels per month. When you withdraw the funds 6+ years later, you are exempt from capital gains tax (to Israel at least. Different American CPAs view kranot hishtalmut differently).

We’ve seen all sorts of misconceptions about this wonderful tool posted on various groups on social media so we want to set the record straight and help you sort out fact from fiction.

1. Myth: It matures after 6 years.
   
   Fact: Bonds mature. Kranot hishtalmut don’t. While you CAN withdraw the funds from your keren hishtalmut tax free six years after opening one, you don’t have to. In fact, you shouldn’t. Unless you really need that money now, you’re best leaving it where it is. It will continue to compound as long as you leave it there and will be a great addition to your pension. We actually made this mistake ourselves once. Fiona discovered that a long-forgotten keren hishtalmut of hers from a temp position she held when she was young(er) and single had reached the 6 year threshold. As it was only a few thousand shekels, she pulled it and organized a family trip to Budapest. While the trip was fabulous, we could have saved up and paid out of pocket instead of liquidating a keren hishtalmut that would have otherwise have continued to grow. We won’t make this mistake again.
   
   
2. Myth: It would be subject to PFIC rules and thus cause tax problems for American citizens.
   
   Fact: The majority of American CPAs in Israel believe that like your Israeli pension, kranot hishtalmut aren’t a problem for American citizens since it is something your Israeli employer gave you and pays the bulk of. Setting up your own self-funded keren hishtalmut or kupat gemel l’hashka’a can be more problematic.
   
   
3. Myth: You can’t choose what to invest in.
   
   Fact: Of course you can! There are multiple tracks to choose from, which each have their own risk level. While many people end up with the “general” track since it is the default, all of ours are invested in the stock market, with some specifically following the S&P 500. Switching tracks – or even investment institutions – is pretty straightforward and incurs no taxes or fees. This is all true for your pension plan as well.
   
   
4. Myth: High management fees are unavoidable and non-negotiable.
   
   Fact: As you may know, but may have forgotten, everything in Israel is negotiable. Just like other service providers, you can call them (or your keren hishtalmut agent) and ask to lower the fees. If they won’t do it, leave for a competitor. Like #3, this applies to your pension plan as well.
   
   
5. Myth: It’s a great way to pay off debt.
   
   Fact: Maybe. It depends. Whenever you sell shares or otherwise pull money from any type of investment, you lose out on any compound interest – aka the magic sauce that makes you more money for the future – that you would have made had you not pulled the funds. The type of debt and its interest rate is what makes the difference here. For example, if your keren hishtalmut gains 8% per year on average and your balance after 6 years is enough to wipe out (American) credit card debt that you are paying 16% interest on, it might be worth it, since you would otherwise lose more money than you’d gain. Nipping your 8% compound-interest-generating keren hishtalmut in the bud to cover a 3% or 5% loan – not so much. Another option is to take a loan against your keren hishtalmut. These usually have pretty good rates – often better than the loan you are trying to wipe out – and will allow your keren to keep compounding. Check with your keren hishtalmut company to see if this is an option for you. Of course, when paying off debt, the most important thing is knowing how you got into debt in the first place and preventing it from happening again.

In conclusion, kranot hishtalmut are magical and are a great way to invest. That said, this post is in no way an exhaustive guide on this magical investment tool. For in depth answers on all things Keren Hishtalmut, make sure to check out this handy guide by our friends at Blue & White Finance.

Do you have a keren hishtalmut? If so, when was the last time you checked your balance and fees?