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

Israel's 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 portfolio change, such as switching mutual funds or selling stocks. Currently, each such transaction triggers a capital gains tax event, reducing the compounding effect of investments over time.

Under the proposed system, investors can freely buy, sell, or switch investments within the account without triggering tax events, deferring capital gains tax until withdrawal. Withdrawals taken as a pension from age 60 onward will be fully tax-exempt, while lump-sum withdrawals before age 60 will incur the standard 25% capital gains tax. Each Israeli citizen can open an account and deposit up to 200,000 shekels annually, allowing a family of four to save up to 800,000 shekels per year tax-free.

Accountant Tsahi Mena illustrates the benefits: a 40-year-old investor depositing 100,000 shekels and making 40 portfolio changes over 20 years could grow their savings to approximately 500,000 shekels under the new model, compared to about 380,000 shekels under the current tax regime, a difference of 120,000 shekels. The main beneficiaries are expected to be savers aged 30 to 50 and families investing for their children’s long-term future.

However, Mena warns that individuals with large existing investment provident funds of one to two million shekels might be disadvantaged by the new annual deposit cap. The reform also includes a "baby protection" clause that will prevent the four largest banks from managing these new accounts for the first three years to encourage competition from investment houses and insurance companies.

The managing entity will handle automatic tax offsetting upon withdrawal, simplifying tax reporting for investors. The reform is expected to take effect in 2027, pending legislation in the Knesset. Mena advises investors to review their current provident fund holdings and plan family-based savings strategies ahead of the reform’s implementation to maximize benefits.