If you are a new immigrant to Israel, you might feel intimidated by the investment landscape. And that’s especially true if you have assets outside of the country. Based on my personal experience, you face two major questions about investing:
- In what can you invest?
- Can you leave your money in the United States? If so, is it a good idea to do so?
In this article, I answer these questions so you’ll have a clear direction on what to do. By the way, I realize that these questions are only the foundational issues. Beyond these questions, you still need to understand investment taxation; if you need an advisor and if so, how to find that person; how does retirement work here in Israel, among many other questions. In my future articles, I address those issues as well. For now, let’s get a strong foundation of investment basics.
Investment options for new immigrants
Let’s first talk about retirement accounts.
If you work in Israel, Israeli law allows you to contribute to retirement and pension plans at work. You can invest that money in the limited pre-packaged plans that your employer provides. For many, a better option is to work with a private investment professional. Private investment professionals offer a variety of investment companies so your investment options are much greater compared to the limited alternatives offered by most employers.
(In future articles, we’ll talk more about retirement and pension plans at the work place and your options.)
You’d think that this issue of contributions to your Israeli retirement plan at work is simple, but it’s not. You can invest in just about anything you want, but if you aren’t careful the investment choices you make might trigger tax penalties and reporting requirements.
For example, if you are American, you should be very cautious when it comes to passive foreign investment companies (PFICs) because if you do invest in these products, you could be subject to harsh US taxation and reporting requirements. (This caveat applies to investments within Israeli retirement accounts and money outside of those accounts.)
What are PFICs? They include any Israeli mutual fund, exchange-traded fund (ETF) or Israeli real estate investment trust (REIT). So before you invest your Israeli retirement plan contributions, check with your US- based accountant. That includes contributions to your kupat gemel (provident fund), insurance savings plans, keren hishtalmut for self-employed people, and government savings plans for kids.
You can still participate in these plans – don’t worry. You just have to be mindful about how you invest those contributions.
Now that we have addressed investments you should try to avoid, let’s talk more about your safe investment options.
The challenge: Finding the right broker
You can invest in anything you like. The trick is to find a brokerage firm that will do business with you.
If you are American and still have an address in the United States, you can continue doing business as you have been, using your existing broker should you desire.
But if you are an American and don’t have an American address, you may run into problems.
Why is that? Because the United States government has made it cumbersome for brokerage firms to accommodate non-resident American citizens. Here’s what’s behind the issue.
The US government forces financial institutions to comply with the Bank Secrecy Act and Anti-Money Laundering regulations. These laws and regulations were put in place to stop money laundering and terrorist financing. That’s good. But those laws also require brokerage firms to monitor and report on American investors living abroad. Complying with those reporting requirements is expensive, and many brokerage firms decided it wasn’t worth it. As a result, they stopped doing business with Americans overseas, and they “fired” all their ex-pat clients.
Where does that leave you?
For Americans without a US address, this means either you currently don’t have a broker or you may soon receive a notice from your existing broker that they can no longer do business with you and ask you to please move your accounts. This could be inconvenient, so prepare in advance.
Fortunately, not all brokerages are that restrictive. If you have been orphaned by your brokerage firm (or are about to be), you may be able to open an account with one of the following international firms: TD Ameritrade; Schwab; Interactive Brokers; Pershing; Trade Station; and possibly a few others.
You want to avoid notification forcing you to move your accounts immediately before you had a chance to investigate alternatives. It’s best to be proactive and look into this now.
I recommend you call your existing brokerage firm and ask if an American citizen who is a non-resident can maintain a brokerage account with the firm. If you already have an account, you may not want to bring attention to the fact that you no longer live in the United States, in case the answer is no. Just call the 800 number and ask the question generically without giving them your information.
If your existing brokerage firm will do business with you even if you don’t have an American address, you don’t have to worry. You may continue doing what you’ve been doing. (In future articles, we’ll talk about the pros and cons of using your existing overseas advisor vs working with a local professional.)
If the brokerage firm says they can’t do business with an American without an American address, it’s time to contact the firms I listed above. Contact them to determine which would be the best fit. Another alternative is to contact an advisor in Israel who works with one of the international firms listed above.
Should you use an Israeli brokerage?
You can also open an account with an Israeli brokerage firm, but I don’t see any benefit in doing that. First, if your Hebrew is less than great, you may find it difficult communicating with your financial institution, and you may be frustrated when you try to decipher your monthly statements.
If you use the banks as your broker, you will find that they are notoriously expensive. And if you use a lower-cost Israeli alternative, your investment options may be limited. You’ll also pay higher commissions compared to the alternatives listed above, and you run the risk of these Israeli brokerage firms selling you a PFIC, thereby incurring an IRS penalty and finding yourself in reporting purgatory. Beware!
Can you/should you leave money in the United States?
If you have a US address, you will have the choice of whether or not to bring your money to Israel or leave it in the United States. (If you don’t have a US address as discussed above, American banks and brokerages may refuse to do business with you, so you may be forced to either open accounts at one of the international institutions I mentioned above or bring the money to an Israeli financial institution.)
As with anything, there are pros and cons.
If you leave your accounts in the United States, the money will be in US dollar currency. While the US dollar is currently one of the world’s strongest currencies, you still have the exchange rate risk. In other words, if the NIS appreciates compared to the US dollar, you could lose money. This is especially important if you plan to make a large purchase in the future, such as buying real estate.
Also, transferring money from your broker in the United States to your bank in Israel can take a few days. You have to plan accordingly.
In addition, you may find it difficult to connect with your financial institution overseas on a continuing basis because of the time-zone difference.
And, of course, there are the reporting requirements. All dividends, interest, and capital gains that are earned outside of Israel must be reported to the Israeli tax authority (after you’ve lived here for 10 years). Likewise, Israel will report all your investment transactions to the IRS as well.
But there are also benefits to keeping your assets overseas. Chief among them is your comfort level. If you have established relations with a good advisor and financial institution and are able to communicate effectively, that’s valuable and I would think twice before discarding a valuable relationship.
In summary
As you can see, Americans have a very wide variety of investments from which to choose. This is true with Israeli retirement accounts (especially if they use an outside advisor), and it’s absolutely the case when it comes to money outside of Israeli retirement accounts. The trick is to be careful about avoiding those investments that may trigger unnecessary tax penalties and reporting (PFICs), and selecting the right brokerage firm to do business with.
If you have an American address and are comfortable with your existing relationships in the United States, you may want to continue doing business that way. If you would prefer to work with someone locally or you must find a new relationship because the firm in the United States is unable to do business with you, consider working with one of the international firms I listed above or working with an advisor in Israel who can do so. ■
Neal Frankle is a well-respected financial author and Certified Financial Planner ® Practitioner. He helps new immigrants make smart decisions about their money both in Israel and abroad so they can avoid the mistakes and frustrations most olim encounter. He is the publisher of WealthPilgrim.com and co-founder of the popular YouTube channel’s Retirement Crusaders. He can be reached at neal.pilgrim@gmail.com or +9754-203-2556.