Israel’s cabinet has approved Minister of Finance Bezalel Smotrich’s proposal to allow both salaried employees and the self-employed to withdraw money from their advanced-study funds (Keren Hishtalmut) 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In the current legal situation, amounts withdrawn by an employee or self-employed person from their account in advanced study fund, including linkage differences, interest and other profits, are exempt from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Withdrawals prior to the tax-exempt time require payments of the marginal tax rate on the withdrawn funds, which can reach 45%.
According to the new Knesset bill, instead of the marginal tax, a tax rate of 15% (and in the case of an individual who has reached retirement age 7.5%), at most, will apply to amounts withdrawn before the exemption date.
In addition, according to the bill, the closer the withdrawal of the funds is to the period established by law for tax-free withdrawal, the lower the tax rate that will be applied. Thus, for example, an individual who has not reached retirement age and wishes to withdraw funds 3 years after the date of the first payment, will pay a tax of 7.5% on the withdrawn funds.
The move was initiated by head of the National Economic Council Prof. Avi Simhon. He received cabinet approval despite public criticism of the bill because it might lead to the public withdrawing large amounts from the funds. Other critics say that the plan is to help fill the state’s coffers rather than to serve the public.
The Ministry of Finance claims that the bill aims to make it easier for the public in a period of economic hardship, ongoing inflation, the increase in the cost of living and the economic uncertainty caused by the war. Releasing funds from advanced study funds, it is claimed, will help households avoid or close loans and manage financially until the crisis period passes.
Advanced study funds are a tax-exempt savings track, which mainly benefits working people in Israel. The funds were originally intended to finance professional training, but over time have become a sought-after savings channel especially for the medium-long term, with the funds accumulated in them frequently being used to finance a large one-time expense (buying a car, renovating the house, a family trip abroad), or to continue accumulating for a pension.
The tax benefits on advanced-study funds are preferable in almost every tax aspect compared with alternative long-medium term savings options. Some NIS 368 billion are currently invested in advanced-study funds, more than any other option on Israel’s provident fund market.
Published by Globes, Israel business news - en.globes.co.il - on August 5, 2024.
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