How Israeli Retirees Can Save Tens of Thousands in Taxes on Large Severance Payments

In Israel, retirees or employees ending their careers often receive significant one-time payments such as retirement grants, enhanced severance pay, or cashing out vacation days. However, these sums are subject to high tax rates, sometimes reaching up to 50%. Experts now highlight legal strategies to reduce this tax burden by spreading the tax payment over several years, potentially saving tens of thousands of shekels.

Shahar Kaykov, head of the Seniority Retirement Support Center at Migdal Insurance and Finance, explains that the state offers two main tax benefits at retirement: tax-exempt severance pay up to about 13,750 shekels per year of employment with the same employer, and a monthly pension exemption of approximately 5,400 shekels. However, withdrawing exempt severance pay in the 32 years before retirement (15 years currently) reduces the monthly pension exemption.

The tax deferral mechanism allows retirees to spread taxable retirement payments over up to six years, based on one year of deferral for every four years worked with the employer. This approach is especially beneficial for those receiving large retirement grants or high salaries, as it lowers the marginal tax rate by distributing income across multiple years. The entire amount is paid immediately, but tax is calculated as if the income were earned gradually.

Financial advisors caution that this strategy requires careful planning. Returning to high-paying work during the deferral period can negate tax savings by pushing income into higher tax brackets. Additionally, retirees must file annual tax returns during the deferral years. Maor Eliasi, CEO of Orient Insurance and Finance, stresses that spreading tax payments is almost mandatory for those receiving large taxable severance sums, unless they continue earning high incomes.

Practical advice includes timing retirement to the last quarter of the tax year to maximize benefits and considering deferral options in cases of death to reduce tax burdens on heirs. Experts unanimously recommend consulting with retirement or tax professionals to tailor strategies to individual circumstances and avoid costly mistakes, such as withdrawing large sums in a single payment without planning.