Israeli Freelancers Can Deposit Over One Million Shekels in Education Funds Despite Tax on Excess
A recent financial article highlighted a lesser-known option for Israeli workers: holding two education funds simultaneously, one as an employee and another as a freelancer. This allows individuals to benefit twice from significant tax advantages, primarily a full exemption from capital gains tax up to annual deposit limits of approximately 20,500 shekels for freelancers and 18,800 shekels for employees.
Matten Shitrit, chief economist at Phoenix Group, emphasized that freelancers can deposit any amount into their education fund, even exceeding one million shekels annually. However, only deposits up to the tax-exempt ceiling enjoy capital gains tax exemption; amounts beyond this are subject to a 25% capital gains tax upon withdrawal. Despite this, depositing above the limit remains attractive due to several benefits.
Education funds offer tax deferral advantages, allowing transfers between investment tracks without triggering tax events until final redemption. Additionally, funds can be transferred between financial institutions without tax consequences or fund liquidation. Management fees are relatively low, averaging 0.62% in 2025 among the top ten providers, compared to higher fees in savings policies and mutual funds. Borrowing against accumulated funds at favorable terms is another benefit.
For investors preferring direct control, some providers offer individually managed education funds (IRA), enabling full portfolio autonomy, lower fees, and tax deferral. This option suits experienced investors comfortable with managing their investments.
Opening an education fund as a freelancer is accessible, even for those with minimal income, by registering as a "small business" with annual revenue under 122,800 shekels. Employees can also open a freelancer-status fund alongside their employment fund. This setup is particularly beneficial for those with significant liquid assets from stock options, bonuses, inheritances, or property sales, seeking an efficient investment platform with tax advantages.
However, funds are locked for six years, limiting liquidity. Withdrawals reset the six-year period and block new deposits unless a new fund is opened. Investors should consider their liquidity needs before committing large sums. Shitrit notes that while education funds are not suited for very short-term investments, those seeking daily return transparency might prefer savings policies instead.
Overall, depositing beyond the tax-exempt ceiling in education funds offers a strategic investment vehicle for freelancers and employees with substantial capital, balancing tax benefits with liquidity considerations.
