A couple sat across from me explaining that they had sold their home in Israel, downsized, and now had a significant sum sitting in their Israeli bank account. They also held another chunk of money in an Israeli investment portfolio they hadn’t examined in years.
“We don’t really need the money right now,” the husband said. “But it bothers me that we might be losing out by keeping everything in the bank when rates here are dropping.” And his wife added, “And we heard that we shouldn’t buy Israeli mutual funds, right?”
That instinct was correct. The conversation revealed a common blind spot among American citizens living in Israel. Investment choices that seem reasonable in shekels can create punishing tax consequences for American *olim*.
The PFIC trap most investors overlook
Americans living abroad face a tax structure that many Israeli investment advisors don’t fully grasp. Israeli mutual funds and pooled investment vehicles are classified by the IRS as Passive Foreign Investment Companies, or PFICs. The tax treatment is intentionally harsh, designed decades ago to discourage Americans from parking (and hiding) money in foreign funds.
Even when the investment is perfectly legal and reported, the IRS applies complex calculations and punitive rates to gains in these funds.
Why location matters more than you think
For Americans maintaining dual financial lives, the principle is pretty straightforward. If you want growth investments like exchange traded funds (ETFs), index funds, or mutual funds, hold them in U.S. accounts. If you want more conservative instruments like bank deposits (called *pikadonot* in Hebrew), Israeli banks could work well.
In many cases, clients hold significant assets in Israel simply because they haven’t considered the alternative. Transferring money to the United States is routine, but the psychological barrier often prevents action. Reasonably, people worry about currency fluctuations, and the tax issues often seem overwhelming (this article is not tax advice; contact your tax professional). But with a good plan in place, *olim* have many choices.
If you’re an American living in Israel with assets in local investment accounts, this issue may already be affecting your returns and taxes. A coordinated review of your cross-border portfolio is worth scheduling before small inefficiencies compound. Visit profile-financial.com/call or contact our office at 02-624-2788.
Douglas Goldstein, CFP® is the director of Profile Investment Services, Ltd. profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for help with your U.S. brokerage and IRA accounts. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The author’s opinions are not necessarily those of PRG or its affiliates. Neither PRG nor its affiliates provide tax or legal advice.
Published September 22, 2026.