There has been much discussion lately regarding the new Child Savings Plan promoted by and funded by the Israeli government. As offered by the Israeli government, the monthly payment of 50 NIS per child can be either deposited into an Israeli interest-bearing savings account in the name of each child, or alternatively into a special separate “Gemel" account operated by various Israeli investment provident funds.
As a result, many US citizens living in Israel started to contact their US tax preparers in order to ascertain exactly how to report these funds, if at all, to the US tax authorities on one’s annual US tax returns.
Unfortunately, most of these accountants, not knowing the exact details regarding this new program, “advised” their clients that these new Gemel savings accounts were problematic since they may be PFIC (Passive Foreign Investment Company) accounts.
What is a PFIC?
Any foreign-based corporation that:
· At least 75% of the corporation’s gross income is “passive income” that is derived from investments rather than from the company’s regular business operations, or
· That at least 50% of the corporation’s assets are investments that produce income in the form of earned interest, dividends or capital gains.
Therefore, in order for one to invest in foreign accounts, such as the new Gemel accounts, it’s imperative that the investments in these accounts not be considered as PFICs.
When reviewing the operations of these new Gemel accounts, we see that they meet the legal terms of a "Separate Account" - a privately managed investment account opened through a brokerage or financial advisor that uses pooled money to buy specific assets. They however are not considered a "Pooled Fund" in which two or more investors pool their funds in an investment account, allowing this group of investors to be treated as a single investor.
According to an article published in the Calcalist newspaper of January, 30, 2017 most Israeli’s have chosen to invest in these new Gemel accounts.
The Calcalist article then reviewed the various investment plans offered by Altschuler Shacham, Meitav Dash and Harel Insurance, for these new Gemel accounts.
Plan A Low Risk:
Government Bonds 40%
Corporate Bonds 33%
Plan B Medium Risk:
Government Bonds 37%
Corporate Bonds 20%