How to choose an Israeli Children's Savings Plan
In 2017 the Israel National Insurance Institute ("Bituach Leumi") will be opening long-term savings plans for every Israeli child who was under the age of 18 on December 31, 2016. Bituach Leumi will deposit ₪50 each month, plus ₪500 when the child turns 18. Young Israelis who don't touch the savings until they turn 21 receive an additional ₪500. Parents may choose to make a matching contribution of ₪50 per month, deducted from their child allowance.
Since the deposits are retroactive to May 2015, a child who is age 2-17 this June will have ₪1300 in their account on June 22, 2017.
Here is the place to sign up:
In order to select a plan, you will need the national ID (teudat zehut) number of the parent who receives the child allowance, and one of the following additional means of identification:
Bank name, branch number, and account number where you currently receive the child allowance
The "message number" that appears on the letter you should have received in the mail. (You can call *2637 or 02-5393700 to request a new letter.)
The teudat zehut "date of issuance" which appears on the last printed line of national ID card of the parent who receives the child allowance.
Credit card number and expiration date of the parent receiving the child allowance.
If your child is eligible for the child allowance and you haven't signed them up for a savings plan, I'd like to give you a little push. You have until June 1, 2017 (or 6 months from birth, if your child was born this year) to choose a plan.
By doing nothing, you are choosing for your young (age 0-14) children's money to be deposited in a low risk "providence fund" - pension-style investment account called a "kuppat gemmel" or "kupat pensia"- selected at random from the twelve funds offering low risk plans. You can compare providence fund plans and see historical rates of return here: https://hly.gov.il/ProvidentFunds.html
(If you are using Google Chrome, you can 'right click' and select "Translate to English" for a reasonable translation.)
If your child is age 15-18 on January 1, 2017, and you do not select a plan, their money will be deposited into a fixed interest deposit account, unlinked to inflation, at your current bank. If the bank where the child allowance is currently being deposited is not among the following banks, the bank will be chosen at random from the list below.
Bank Otsar HaChayal (a division of FIBI)
Bank Massad (a division of FIBI)
These banks are offering different terms and widely varying interest rates, such as 0.19 at Bank Leumi to 0.80 at Bank Hapoalim. Therefore, even if you want the money to be deposited into a bank fund, it would be prudent to compare plans. You can compare bank options and see the interest rates here: https://hly.gov.il/banksManageInfo.html
The two main options are
1. Providence fund
2. Bank deposit account
Most Israelis can select an account-type based solely on which plan they believe will give their child the highest return by age 18. There are even investment tracks specifically adhering to Jewish Halachic law or Islamic Sharia law. And with the management fees being picked up by the government, the investment tracks are a great option. However, US dual citizens must also consider the tax and reporting considerations of the accounts.
As I've covered in a previous post, US citizens have an obligation to report worldwide assets and income to the US government. Some types of investments and savings accounts may fall into the category of Passive Foreign Investment Companies, or "PFICs", which require additional tax and reporting considerations, including, but not limited to:
Reporting the investment on Form 8621 in the first year, to elect how the investment will be treated - how the income will be accounted for and recognized. This decision should be made with a US CPA experienced in accounting for PFICs.
Annual filing of Form 8621 to report the holdings, which can be very costly, as proper reporting is complicated and time consuming, and research is generally needed from both the accountant and the taxpayer.
Tax of 39.6% plus interest.
We believe that the providence funds offered through Bituach Leumi would be categorized as PFICs under US tax law, and would be subject to the above onerous and punitive tax and reporting requirements. For a PFIC account opened during 2017, the first reporting of the account would be due June 15, 2018, along with the US tax tax return, if applicable.
There is no question, the safest option to minimize both taxes and reporting to the US are the BANK deposit accounts. The majority of people I speak with are satisfied with that answer; however, many potential investors ask, "Won't the additional income from the providence funds outweigh the additional costs?"
My opinion, based on calculations with the published average rates of return from the available funds, is that the additional gains from investing in a providence fund, as opposed to a bank account, are very unlikely to outweigh the additional taxes and accounting fees to properly report the investment. This is true even more so with the "low risk" fund options your child would get by default, as these have historically averaged less than 4% return. However, if you are interested in supporting your friendly local US CPA, the "high risk" plans are very temping, with Altshuler Shaham boasting a 10.55% average return over the past five years.
By contrast, the bank accounts are unlikely to accrue enough interest to require reporting on a US tax return if the child has NO OTHER income. (A child or dependent with no earned income is required to file a tax return if they earned USD 1,050 for 2016, adjusting for inflation each year.)
Which BANK account is best for me?
Which account is best for your family will depend on several factors, beginning with the age of your child or children. You will also need to determine if you want a plan with "exit stations"- the ability to switch bank savings plans every five years. By relinquishing the exit stations you can get better interest rates initially.
Go to the site to compare bank deposit plans.
Choose your child's age.
Choose with or without exit stations.
Scroll down to compare options.
Along the right side you will see the bank name. along the top you will see the three options, from left to right:
ריבית משתנה* - Variable interest: listed as the quoted basic interest rate (Prime) minus X. For example, if the bank is offering "P-1.25" and today's prime rate is 1.60%, your child will be earning 0.35% interest.
ריבית קבועה צמודה - Fixed interest linked to the Israel consumer price index
ריבית קבועה לא צמודה - Fixed interest unconnected to the consumer price index
Read carefully to make sure you choose the bank you want to use. Even with exit stations, you will not be able to switch banks, and the bank you choose will also be the default for any future younger siblings.
I am not a financial adviser and cannot tell you which bank or terms to choose. My goal in writing this is to bring the issues to your attention and encourage you to make an educated selection, which will most likely be better than the default.
Will these accounts need to be reported on my "FBAR"?
As with any financial account outside the US, both the providence funds and bank accounts would need to be reported on a Report of Foreign Bank and Financial Accounts (FBAR), if you are required to file an FBAR. There is no minimum age to require reporting; however, if your child has NO OTHER accounts outside the US, these savings plans are unlikely to trigger an FBAR requirement. Unless you are contributing the additional ₪50 per month and investing in a providence fund earning over 6% return, it is improbable that your child's savings fund alone would reach the $10,000 threshold to require them to file an FBAR. Please speak with your US accountant to determine if you need to report having "signature authority" over your children's funds.
For a full explanation of the savings plans, the Ministry of Finance has a published a document in English: