The Israeli government has approved Finance Minister Bezalel Smotrich’s proposal to allow employees and the self-employed to withdraw money from advanced study funds (Keren Hashtalmot) with a reduced penalty until the end of 2024. The bill on the matter will now be fast-tracked through the Knesset.
In the current legal situation, amounts withdrawn by an employee or self-employed person from his/her account in the Advanced Study Fund, including correlation differences, interest and other earnings, are exempt from tax only if 6 years have passed from the date of the first payment, or 3 years from the date of the first payment, if the person has reached retirement age.
Withdrawals before the tax-free period require payment of the marginal tax rate on the withdrawn funds, which can be as high as 45%.
According to the new bill in the Knesset, instead of the marginal tax, a tax rate of 15% (and in the case of an individual who has reached retirement age, a maximum of 7.5%) will be applied to amounts withdrawn before the exemption date.
In addition, the bill stipulates that the closer the withdrawal date is to the period set by law for tax-free withdrawal, the lower the tax rate applied. For example, a person who has not reached retirement age and wants to withdraw money after 3 years from the date of the first payment, will pay a tax of 7.5% on the withdrawn money.
The move was initiated by National Economic Council Chairman Prof. Avi Simhon. It received cabinet approval despite public criticism of the bill, which could lead to the public withdrawing large sums from the funds. Other critics say the plan is intended to help fill the state coffers rather than serve the public.
The Finance Ministry claims the bill aims to make things easier for citizens during a period of economic hardship, persistent inflation, high living costs and economic uncertainty caused by the war. It claims that releasing funds from advanced study funds will help families avoid or close loans and manage their finances until the crisis period passes.
Advanced study funds are a tax-exempt savings channel, which mainly benefits workers in Israel. The funds were originally intended to finance vocational training, but over time they have become a savings channel that is in demand, especially in the medium and long term, as the money accumulated in them is repeatedly used to finance large one-time expenses (buying a car, renovating a house, or a family trip abroad), or to continue accumulating for a pension.
The tax advantages of advanced study funds are better in almost every tax respect than alternative long-term and medium-term savings options. Currently, about NIS 368 billion are invested in advanced study funds, more than any other option in the Israeli savings fund market.
This article was published in Globes, Israeli Business News – en.globes.co.il – on August 5, 2024.
© Copyright Globes Publisher Itonut (1983) Ltd., 2024.
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