Investing for US citizens living in Israel
US citizens living in Israel need to evaluate investments not only by return, risk, and management fees, but also by US tax and reporting rules. This page explains PFIC classification, which Israeli investment products may create complexity, and more suitable ways to manage an investment portfolio and emergency fund.
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Before you begin
If you are a US citizen living in Israel, one of the most important lessons you need to learn about your money is this: not every investment product that suits your friends or colleagues in Israel also suits you.
While the average Israeli investor evaluates financial products mainly through returns, management fees, and risk, you face an additional and complex layer of criteria—US tax and reporting laws. Products that are very popular in Israel, such as local mutual fundsAn investment vehicle that allows many investors to pool their money into a shared portfolio of assets managed by a professional., Israeli ETFs, or a Kupat Gemel LeHashkaa (קופת גמל להשקעה)A flexible savings vehicle that allows withdrawal at any time, or receipt of a tax-exempt pension after age 60., can become a bureaucratic and financial nightmare for someone who holds a US passport or green card.
This does not mean that you should give up the growth potential of your money and leave it in a current account. It does mean that you need to understand in advance which channels require special review, how the United States classifies your assets, and how to build a smart, suitable investment portfolio that avoids penalties and unpleasant tax surprises.
Why do investments that suit Israelis not always suit Americans?
When an Israeli with no US connection wants to invest, the surrounding system is transparent and simple. The local bank or investment house withholds capital gains tax, reporting to the authorities is done automatically, and that is the end of the matter.
For a US citizen, the situation is completely different. The IRS does not view Israeli financial products in the same way as the Israel Tax Authority. For the US government, anything outside the United States is considered a foreign or alternative asset and is subject to strict regulations originally intended to prevent wealthy citizens from hiding capital in overseas tax shelters.
PFIC: the major pitfall for US citizen investors
Why is PFIC classification a problem?
- Aggressive taxation: Gains from an asset classified as a PFIC may not receive the reduced US tax rates for long-term capital gains. Instead, they may be taxed at the highest ordinary income tax rates, together with retroactive interestThe "price of money" – the amount paid for the use of someone else’s money, as income to the depositor or as a cost to the borrower. charges.
- Complex and expensive reporting: You need to file a special form, Form 8621, for each security separately every year. Completing these forms requires extremely complex calculations, which can dramatically increase the fee you pay your accountant—often to an amount greater than the asset's entire returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested..
Which financial products in Israel may be problematic?
To avoid the PFIC trap, it is important to know which popular products in the Israeli market raise strong red flags in the United States:
| Product | Why might it be problematic? |
|---|---|
| Israeli mutual funds and ETFs | Because they are foreign entities holding passive assets for the public, they are almost always classified as PFICs. This also includes Israeli index-tracking funds that replicate American indices such as the S&P 500An index composed of 500 of the largest and leading companies traded on U.S. stock exchanges.. |
| Kupat Gemel LeHashkaa | This flexible savings product, popular among Israelis, is treated in the United States as an ordinary, unprotected foreign investment account. Because its assets are managed through foreign funds, it exposes you to PFIC rules and complex reporting. |
| Money-market funds | Although they serve as a safe and liquid alternative to a bank depositA bank savings product in which a sum of money is "locked" for a defined period in exchange for a predetermined interest rate., a money-market fund is legally a mutual fund and therefore falls under the PFIC definition. |
| Savings policies through insuranceA contract under which an insurance company undertakes to compensate the insured in the event of damage in exchange for a periodic payment. companies | These are managed similarly to provident funds and are exposed to problematic US taxation and reporting. |
Where can you invest?
Although the rules narrow the available options, you can still build a suitable portfolio without using products that may be considered PFICs. You can manage appropriate securities independently or use a managed portfolio built especially for US citizens.
Many US citizens manage the liquid part of their investment portfolio through a self-directed brokerage account and focus on these assets:
| Option | Explanation |
|---|---|
| Individual shares and bondsA type of "loan" that an investor provides to a government or company in exchange for repayment of the principal plus interest. | Directly buying a company's share—whether an American company or an Israeli company such as Teva or NICE—is not considered a PFIC. |
| American ETFs | ETFs registered and managed in the United States, such as those offered by Vanguard, BlackRock iShares, or SPDR, receive ordinary and convenient capital gains taxation and do not create complex IRS reporting. |
Where do you open a brokerage account?
You can buy American securities through Israeli banks or local investment houses, but confirm that they know how to serve US citizens and provide you with the appropriate reporting forms.
A managed portfolio for US citizens—professionally managed for your circumstances
Not everyone wants to choose securities, make purchases and rebalancing decisions, and monitor an investment portfolio regularly. For those who prefer to entrust management to a professional, both Israeli and cross-border providers offer managed investment portfolios tailored to US citizens living in Israel.
In such a portfolio, the investment manager should take into account the tax and reporting restrictions that apply in the United States. The portfolio is generally built with individual shares and bonds, and sometimes American ETFs, while avoiding Israeli or other foreign funds that may be considered PFICs. Some solutions hold the account at an Israeli bank or investment house, while others use an American custodian.
For a comparison of the options available in Israel for managed investment portfolios for US citizens:
Compare the offers
Before choosing a managed investment portfolio for US citizens living in Israel, compare the offers from institutions specializing in this area. Our table brings together each institution's management fees, minimum investment, investment policy, fit with US tax and reporting requirements, and additional services, helping you choose the offer that best suits your needs.
An emergency fund for US citizens—what should you do?
Previous chapters explained the critical importance of building an emergency fund—a completely safe and liquid cash amount intended for emergencies such as lost income or an unexpected medical expense, sufficient to cover three to six months of living costs.
Safe and liquid alternatives for your emergency fund
| Alternative | Explanation |
|---|---|
| Bank deposits—Pahak (פח״ק) or a default deposit | An ordinary bank deposit at an Israeli bank is not a security and is not a PFIC. Its interest is taxed according to the law, and it is very simple to report. |
| Makam"Short-Term Loan" – a one-year government bond that serves as a relatively low-risk investment instrument. (מק״מ), a short-term loan | A short-term government bond issued by the Bank of Israel. Because it is a direct government bond rather than a managed fund, it is not a PFIC, is considered very safe, and offers daily liquidityThe speed and ease with which money can be withdrawn from an investment and converted into cash in a bank account without significant penalties. on the stock exchange. |
| US money-market funds | If you manage your money in an American brokerage account, you can hold your emergency fund in American money-market funds that benefit from Federal Reserve interest without foreign-tax complications. |
Action plan: what should you do in practice?
Recommended steps
- Pause automatic purchases: If you have standing orders to a Kupat Gemel LeHashkaa or Israeli mutual funds, pause them until you clarify your tax status.
- Review your existing portfolio: Go through your Israeli accounts and identify whether you hold local securities that may be considered PFICs.
- Choose a suitable management method: If you manage your investments yourself, use an American broker or an Israeli institution that allows direct purchases of suitable securities. If you prefer professional management, examine a managed portfolio tailored to US citizens and confirm its investment structure, custodian, costs, and reports in advance.
- Redefine your emergency fund: Move your emergency money to safe channels that do not create complex reporting obligations, such as Makam or a bank deposit.
- Consult before making major moves: Before investing significant amounts or buying a complex financial product in Israel, confirm with an accountant or qualified US tax adviser that it will not have retroactive consequences.
The bottom line
- Israeli investments require caution
- Financial products managed in Israel, including funds and provident funds, expose you to the severe PFIC classification, which leads to high taxation and expensive reporting.
- The solution is a suitable investment structure
- You can manage the portfolio independently with suitable shares, bonds, and American ETFs, or choose a managed portfolio built especially for US citizens.
- The emergency fund should remain simple
- Avoid using an Israeli money-market fund for your emergency fund. Use Makam or ordinary bank deposits instead.
- Early planning saves money
- Do not assume that an investment product recommended in the Israeli financial media suits your tax profile. Always check the IRS implications before the first deposit.
Frequently asked questions
Is a US citizen legally prohibited from investing in an Israeli mutual fund?
No. The restriction does not come from the State of Israel or the bank, but from US tax law. You may buy Israeli funds, but you need to consider that annual reporting costs for Form 8621 and taxation of the gains may eliminate the investment's entire benefit.
How can I tell whether a particular Israeli fund is a PFIC?
The rule of thumb is that every mutual fund, index-tracking fund, money-market fund, savings policy, or ETN that is not registered in the United States—meaning it has no US ticker and is not managed by an American company on a US exchange—is considered a PFIC by the IRS.
If I buy an American Vanguard ETF through an Israeli broker, is that acceptable?
Yes. The place where you buy the security—an Israeli bank or a local broker—does not determine its tax classification. The security itself is what matters. If you buy an original American ETF, you are safe from PFIC rules.
Should I immediately close a Kupat Gemel LeHashkaa I opened in the past to avoid penalties?
Do not act hastily. Withdrawing the money immediately may create a taxable event in Israel, including a 35% early-withdrawal penalty or 25% real tax, while also triggering a complex US reporting obligation in the same year. The right step is to take the fund's information to a professional specializing in US taxation and choose the most worthwhile exit strategy.
In summary
Investing for US citizens living in Israel requires a little more review and planning, but that does not mean you should avoid investing. Before choosing an investment product, understand not only its potential return but also its possible tax and reporting implications. Early review, a basic understanding of PFIC, and consultation when needed can help you make better decisions and avoid unnecessary surprises.