Study Shows Tax-Free Savings Accounts Offer Significant Long-Term Gains
A study analyzing Israeli tax-advantaged savings accounts, known as "Keren Hishtalmut" (study funds), reveals substantial tax savings for individuals who leave their funds invested beyond the initial six-year liquidity period. For instance, a saver who leaves 180,000 shekels in such an account for an additional ten years after it becomes accessible could accumulate an additional 124,564 shekels in tax-free profit, bringing the total balance to 304,564 shekels. This contrasts sharply with a regular investment portfolio, where the same initial amount would grow to only 283,278 shekels after capital gains tax.
The liquidity period for these accounts is typically six years from the first deposit, though it can be shortened to three years for those reaching retirement age or withdrawing for recognized study purposes. Withdrawing funds before the liquidity period incurs taxes on the entire amount, not just the profits. The accounts themselves warn of this and suggest taking a loan against the balance as an alternative to early withdrawal.
The analysis highlights the impact of management fees, noting that a 0.6% annual fee reduces a gross return of 6% to a net 5.40%. Over a decade, these seemingly small fees can erode tens of thousands of shekels from the final balance. The study also points out that the tax benefit is capped based on salary, with a monthly salary ceiling of 15,712 shekels for the full exemption, assuming a 7.5% employer and 2.5% employee contribution. Salaries exceeding this limit mean a portion of the contributions falls outside the tax advantage.
Furthermore, the study emphasizes that transferring funds between managing institutions preserves the account's seniority, making management fees a key point for negotiation. Savers paying high fees can switch to cheaper providers without resetting their account's eligibility clock. The analysis assumes a constant rate of return and does not account for ongoing monthly deposits made after the liquidity date, meaning actual balances for those who continue to contribute could be significantly higher.
