Investment Provident Funds Offer Tax-Free Retirement Income With Conditions
The investment provident fund is a savings product suitable for families saving for children, young savers with medium to long-term goals, and those nearing retirement seeking a tax-free monthly pension supplement. While it can be used for any time horizon, its main advantage is realized after age 60. The fund allows capital gains tax deferral when transferring between providers or investment tracks, and offers a full capital gains tax exemption on withdrawals made as a monthly pension after age 60. Annual management fees range from 0.6% to 0.75%, and there is an annual deposit limit of 83,600 shekels per individual, adjusted yearly for inflation.
Anyone can contribute to an investment provident fund via regular or occasional deposits, and multiple accounts can be opened for family members to increase the total annual deposit ceiling. However, caution is advised when depositing under a child's ID number, as their consent is required to access the funds later. Withdrawals are liquid at any time, but withdrawals before age 60 are taxed at 25% capital gains tax. After 60, converting the balance into a monthly pension allows full tax exemption. Transfers between investment tracks or providers do not trigger tax payments, unlike mutual funds.
Leading providers include Clal Insurance, which has delivered about 7.5% returns this year and 46% over three years, second only to Harel Insurance with 47%. Migdal and Phoenix Insurance also posted strong three-year returns of 45%. Competing products like mutual funds often have lower fees but require active management and incur immediate capital gains tax on trades, unlike the provident fund’s tax advantages.
Savings tips include maximizing family deposit limits by opening separate accounts for spouses and possibly children (with caution), delaying withdrawals until retirement to benefit from tax exemptions, fully utilizing the annual deposit ceiling before year-end, and using the fund as an emergency cash reserve due to its liquidity and better returns than checking accounts.
