Israel Plans Tax-Free Investment Accounts to Boost Long-Term Savings by 2027

The Israeli Ministry of Finance has announced a new capital market reform called the "Investment Account," aiming to allow Israelis to manage investment portfolios up to 200,000 shekels annually without paying capital gains tax on asset transfers within the account. This reform, inspired by a longstanding American model, seeks to address the erosion of savings caused by immediate taxation on every change in investment composition, such as switching mutual funds or selling stocks. Currently, each such transaction triggers a capital gains tax event, reducing the compounding effect over time.

Under the proposed system, investors can freely buy, sell, or switch investments within the account without incurring tax until withdrawal. For example, a 40-year-old investor depositing 100,000 shekels annually and making 40 investment changes over 20 years could accumulate around 500,000 shekels, compared to about 380,000 shekels under the current tax regime, a difference of approximately 120,000 shekels. Withdrawals taken as a pension from age 60 onward will be fully tax-exempt, while lump-sum withdrawals before 60 will be taxed at 25% capital gains.

The reform is expected to benefit long-term savers aged 30 to 50 and families saving for children. However, individuals with large existing investment provident funds (kupa gemel) of one to two million shekels may be disadvantaged by the new annual deposit cap of 200,000 shekels, which limits future contributions compared to current conditions. To foster competition, the four largest banks will be barred from managing these new accounts for the first three years, allowing investment houses and insurance companies to participate.

Tax deductions will be handled automatically upon withdrawal, eliminating the need for complex annual tax filings. Experts emphasize the importance of a simple, transparent digital platform to help the public track family deposit limits and savings plans easily. The reform requires parliamentary approval and is expected to take effect in 2027. Financial advisors recommend that savers assess their current provident fund holdings and begin family-level financial planning now to optimize benefits once the law is enacted.