If you’re an oleh from the United States and you’re considering putting your money into an Israeli or other foreign mutual fund, think again.
Here’s why:
Owning a foreign mutual fund may cause increased U.S. taxes
If you have money in a teudat sal, Israeli pension, or Israeli mutual fund, the IRS may consider this kind of investment a “PFIC” (Passive Foreign Investment Company). PFICs are subject to different, more complex, tax reporting than regular U.S. investments.
Also, owning PFICs and foreign mutual funds generates additional paperwork, as you must file an IRS Form 8621 for every PFIC owned. Obviously, don’t try to hide the foreign mutual fund from Uncle Sam. The U.S. tax authorities will find out about the overseas money since foreign (including Israeli) financial institutions report their clients’ earnings from PFICs to the IRS.
How do I know if I own a PFIC?
A PFIC is a foreign-based corporation that fulfills at least one of two conditions:
- At least 75% of its income is passive, that is, derived from investments rather than from regular business operations.
- At least 50% of the company’s assets are investments producing income in the form of earned interest, dividends, or capital gains.
Check with your accountant to see if any of your foreign investments would be defined by the IRS as a PFIC. If so, you might want to consider moving those assets into other investments that won’t have such problems. This article is for educational purposes only, and is not to be considered tax advice. Be sure to check with a licensed tax professional about your situation.
There is a solution
You can invest in mutual funds or ETFs (Exchange Traded Funds) while living in Israel by having a U.S. brokerage account, which means you can invest globally from an American-based account.
Mutual funds are a great way of diversifying your portfolio, but make sure the funds you purchase are the right ones for YOU, not just the popular funds your insurance agent/banker/broker wants to sell you. Read Profile-Financial.com/diversification for more tips on diversifying your portfolio, then be in touch to see how we can help you.
Call my office (02-624-2788) to find out how you can set up a U.S. retirement or investment account for yourself, or click here to get our free toolkit.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published October 15, 2018. Updated April 2020