Should you lock up your money for 24 years?
How many years does Grandpa have before retiring? You might think that depends on his age, but the question is not trivial at all. If he's 64 today, he has 15 years left but if he's 66, he has only five. No, we didn't get the math wrong: it's based on the wonders of the legislation governing tax on pension savings in Israel.
Less than a week remains until the end of the Gregorian year, which is the deadline for Grandpa and Grandma, or your parents, to make investments eligible for tax breaks in 2006. Here are some points that could help you make decisions about savings, for yourselves or your offspring.
1. I'm a 40-year old woman and want to save for my child. Can I, and should I, continue to put money into a provident fund?
Yes and no. First of all, to start a provident fund, you have to have a pension fund into which you deposit money from a salary of at least NIS 7,000. secondly, under the amendment expected to pass soon, you won't be able to open a provident fund account on your child's name, only on your own. If you meet these two conditions, you can open a provident fund account on your own name that you mean to give your child. But remember, you can't withdraw from the fund until you retire, at age 64.
2.That means I have 24 more years until retirement. Should I open a provident fund account?
The answer depends. If you earn money that is not fully covered by pension provisions, you certainly should. You can use the uncovered part of your pay to make the deposits, on which you can get a tax break. It is an excellent investment.
If you do not have any part of your pay that isn't covered by pension provisions, then your deposit won't be tax deductible. The only advantage that a provident fund has to offer you in that case is the exemption from capital gains tax, which is 20% on the profits your fund accrues during its 24 years of savings. Does that exemption justify locking up money in the fund for 24 years? That's a matter of taste. Investment experts claim it is.
3. I'm 46 and want to save for my son through a provident fund. What rules apply to me?
If you were born before January 1961, the same rules as above (that apply to a 40-year old) apply to you, with one difference: you are spared the need to have a pension fund as a precondition for depositing in a provident fund.
Class action against Krembo maker Strauss-Elite
An NIS 7.5 million class action motion has been submitted against Strauss-Elite Industries (TASE: <a target="_blank" href="http://www.themarker.com/eng/tools/toolsResult.jhtml?application=8&chosen=746016">STEL</a>) for allegedly misleading consumers in a marketing campaign for Krembo, a chocolate-coated biscuit topped with eggwhite.
Doron Masareno claims that Strauss-Elite "cunningly" misled consumers in order to boost sales of the confection. The company is presenting a "bargain" packaging of Krembos, consisting of two separate cartons, each containing 40 of the sweets, in short - 80. But in practice, he claims, each box has only 20 Krembos.
As the package costs NIS 32.99, he values his damage at NIS 16.495.
4. Can I withdraw money from a provident fund before retiring?
You can withdraw money without being penalized from age 60. but if you want to get that capital gains tax, you have to wait until retiring at 64 (women) or 67 (men). But there is no point in withdrawing money from a provident fund without the capital gains tax exemption, so in practice, provident funds are locked up until you retire.
5. I'm a grandmother close to retirement age. Does that mean that my provident fund savings will be released in a few years?
Yes, if you have an "old" provident fund. No, if you're considering starting to invest in a fund. The rule governing the capital gains tax exemption is dependent on depositing for 15 years, or reaching retirement age, whichever is the later.
For instance, a 60-year old granny wanting to open a new provident fund has to wait more than the four years to retirement: she has to wait 15 years until accruing the seniority, to get the tax exemption.
6. I am a grandmother older than 64. Is my new provident fund locked up for 15 years?
No, and that's the confusion with which we began. You have to wait only five years to get your full capital gains tax exemption. If you're 63 and want to invest in a new provident fund, you'll have to wait to age 78 (15 years) to open the fund without paying tax. But if you're already 64, you can withdraw the money at 69. Why? Because the ways of the Israeli legislator are truly wondrous and we can only accept its decree.
7. Why should I even sink myself into a provident fund for so many years? What about a training fund (keren hishtalmut)?
Training funds are the best savings vehicle around: you can get tax deductions on depositing part of your pay, the savings are exempt from capital gains tax and the money is only locked up for six years, not until you retire.
Therefore, it is recommended that anybody who can, should make the maximal provision in a training fund. That rule applies to the self-employed too, who can deposit up to 7% of income up to NIS 18,000 a month. Wage-earners can deposit up to 10% of pay up to NIS 16,000, but that is on condition that the employer agrees to deposit some of the money for them.
Deposits in training funds is beyond investment in an provident fund. In other words, you can take advantage of the full tax benefits in a provident fund and add the deposits in the training fund. It is recommended to take advantage of both tax breaks.
However, a training fund is not a solution for saving for a child or grandchild. Wage-earners have to make the deposit in the training fund together with the employer, so that rules out using it as a savings program for offspring. Moreover, unlike provident funds - training funds are not available for the self-employed, unless they are recognized by the Income Tax Authority.
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