Same fund, two passports, two different answers
Two olim take the same job and the same קרן פנסיה (Keren Pensia). For the British one the answer is settled: once she is non-UK-resident, only Israel taxes it. For the American one it is not settled, because the US-Israel treaty was signed in 1975 and contains no article on pension contributions or on the growth inside the fund1.
Almost every new oleh assumes this is a lookup question with a published answer. It is not. Your Israeli colleague never has to ask it and your payroll department has no opinion on it, because it is not an Israeli question at all.
General information, not advice
Why does the British oleh have a settled answer and the American one does not?
Because the UK stops taxing you when you stop being resident, and the US never stops. UK rules are explicit that "non-residents only pay tax on their UK income - they do not pay UK tax on their foreign income," with residence decided by the Statutory Residence Test4. Once a British oleh is non-resident, her Israeli pension is an Israeli matter and the UK has no claim on the build-up to argue about. The UK-Israel convention carries a pensions article that leaves pensions taxable only in the territory where the recipient is resident, and it carries no saving clause to take that back3.
A US citizen is taxed on worldwide income wherever they live5, so the US claim survives aliyah entirely. The US-Israel convention does have a pensions article, Article 20 (Private Pensions and Annuities), and paragraph 1 makes pensions taxable only in the state of residence. But Article 6(3) says a Contracting State may tax its residents and its citizens "as if this Convention had not come into effect," and the exception list at Article 6(4) preserves only Articles 10, 21, 26, 27 and 28. Article 20 is not on that list1. For a US citizen in Israel, the pensions article is switched off.
Treaty treatment: what the convention says, and the article that is missing
The convention was signed at Washington on 20 November 1975, amended by protocols of 30 May 1980 and 26 January 1993, and took general effect under Article 31 on 1 January 19951. Its 32 articles include Private Pensions and Annuities (20), Social Security Payments (21) and Relief from Double Taxation (26). There is no article on pension schemes, no relief for contributions paid into a scheme in the other state, and no provision deferring tax on income accruing inside such a scheme.
Article 20 is also narrower than its title suggests. Paragraph 4 defines "pensions and other similar remuneration" as periodic payments made by reason of retirement or death in consideration for services rendered1. It is a rule about money coming out, not about money going in or compounding. Neither the UK-Israel convention nor the US-Israel one contains a contributions article3, but only the American oleh is exposed by the omission, because only the American oleh is still being taxed by the other country.
Israeli treatment: what Israel does with the contribution and the growth
Israel treats the vehicles as tax-advantaged on the way in and taxes them on the way out, within statutory ceilings and conditions set by the Capital Market, Insurance and Savings Authority and the Israel Tax Authority14. That is the whole of the Israeli story. Your קופת גמל (Kupat Gemel) and קרן השתלמות (Keren Hishtalmut) statements are written in shekels for a system with one tax authority in it.
None of that is evidence about the US treatment. The two systems characterise independently, and this is where olim most often go wrong: an Israeli statement showing untaxed growth is describing Israeli tax, not American tax.
US treatment: the three positions a preparer can take
Because the treaty is silent, US treatment of the build-up is a position rather than a rule. Three are in common use, and they differ on two questions: whether the employer contribution is current compensation to you, and whether growth inside the wrapper is your income each year.
| Position | Employer contribution | Employee contribution | Growth inside the fund | What it means at withdrawal |
|---|---|---|---|---|
| Deferral respected | Not current income | Not taxed again on the way in | Not taxed annually | Whole payment is US-taxable, with a foreign tax credit for Israeli tax1 |
| Split treatment | Current compensation when credited | From already-taxed US income | Often still deferred | Only growth is taxed; needs a basis record from your first Israeli payslip |
| Fully transparent | Current compensation | From already-taxed US income | Your income each year, with no cash distributed to pay the tax | Largest US basis, smallest taxable payout, heaviest paperwork |
There is no Form 8833 disclosure that fixes this. That form exists to disclose a treaty-based return position under Internal Revenue Code section 611411, and a treaty-based position needs a treaty provision to rest on. The deferral question has none, which is precisely why it stays a matter of professional judgement.
Which Israeli vehicle triggers what on the US side?
| Israeli vehicle | Israeli tax treatment | Likely US characterisation | US forms in play | At withdrawal, for a US person |
|---|---|---|---|---|
| Keren pensia | Tax-advantaged accrual, taxed as an annuity on payout14 | Foreign retirement arrangement; no US-code equivalent | 8938; FBAR; 8621 on pooled holdings | Payments fall inside Article 20, which the saving clause switches off for citizens1 |
| Bituach menahalim | Tax-advantaged accrual inside an insurance contract14 | Insurance wrapper as well as a retirement arrangement | 8938; FBAR; 8621 where the contract holds pooled funds | Same Article 20 analysis, plus an argument about the insurance layer |
| Kupat gemel | Tax-advantaged accrual, taxed on withdrawal14 | Foreign savings vehicle; the retirement label is weaker | 8938; FBAR; 8621 is the live risk | A lump sum is not a "periodic payment", so Article 20 may not reach it1 |
| Keren hishtalmut | Israeli relief on qualifying withdrawal after the holding period14 | Ordinary foreign investment account, not a pension | 8938; FBAR; 8621 on pooled holdings | No US mirror for the Israeli relief, so an Israeli-untaxed payout can still be fully US-taxable |
What reporting attaches no matter which position you take?
Three obligations run in parallel with the deferral argument and do not depend on winning it. First, Form 8938: the IRS states that "if you have an interest in a foreign pension or deferred compensation plan, you have to report this interest on Form 8938" once your specified foreign financial assets exceed the threshold that applies to you6. Living abroad, those thresholds are more than 200,000 USD at year end or 300,000 USD at any point in the year if unmarried, and 400,000 USD or 600,000 USD filing jointly7.
Second, the FBAR. FinCEN Form 114 is due when the aggregate value of your non-US financial accounts "exceeded 10,000 USD at any time during the calendar year reported," filed by 15 April with an automatic extension to 15 October8. Filing Form 8938 "does not relieve you of the separate requirement to file the FBAR", and the reverse is also true6.
Third, PFIC. This is where a pension wrapper stops being a wrapper. Israeli retirement vehicles invest through pooled sub-funds, and a non-US pooled fund is a Passive Foreign Investment Company for a US person, reported on Form 86219 under a default section 1291 regime that spreads the gain across your holding period and adds an interest charge10. The Form 8621 instructions do exempt PFIC stock held through certain retirement arrangements, but the ones listed are US-code: a section 403(b) or 457(b) plan, and an individual retirement plan or annuity under section 7701(a)(37)10. An Israeli keren pensia is none of those. Treat the wrapper as transparent and the pooled holdings inside become visible, with the PFIC question attached.
A worked example: one salary, two tax systems
Take a gross monthly salary of 25,000 NIS and total pension contributions of 4,600 NIS a month across the employer and employee shares, so 55,200 NIS across the year, and assume 3,300 NIS of growth inside the fund. Read your own תלוש משכורת (Tlush Maskoret) for the real numbers. At an illustrative 3.7 NIS to the dollar, and using the Bank of Israel representative rate for an actual filing16, that is roughly 14,900 USD contributed and 890 USD of growth.
- The British oleh. Non-UK-resident, so HMRC sees none of it4. One system, one bill, paid later.
- The American oleh, deferral respected. Nothing on the US return this year. Every shekel of the eventual annuity is US-taxable, offset by a foreign tax credit1.
- The American oleh, fully transparent. Roughly 14,900 USD of contributions and 890 USD of growth are picked up now, with no cash distributed to pay the tax. In exchange he builds US basis, so less of the future payout is taxed twice.
The trap is neither position. It is taking the second for six years, switching preparers, and taking the first at retirement, which taxes the same money twice with no record left to prove it.
What does this change about the contribution decision itself?
For a salaried employee, less than people expect. The workplace arrangement is set by Israeli law rather than by you14, so "take it as salary instead" is not on the table for the base tier. Your live decisions are which vehicle and what sits inside it. A track with fewer pooled sub-funds narrows the PFIC surface, and you can choose it in month one instead of arguing about it in year ten.
For an עוסק מורשה (Osek Murshe) the voluntary top-up above the mandated minimum is a genuine choice, and it is the one place the deferral question changes the arithmetic. The Israeli deduction is real, but if your preparer does not treat the wrapper as deferred, that deduction buys an Israeli benefit and a US cost in the same movement. Note also that the foreign earned income exclusion "will not reduce your self-employment tax"12, and that a totalization agreement is the instrument that relieves double social-security taxation where one exists, with the country list held by the Social Security Administration13. Meidahon covers the self-employment side separately.
The decision procedure
- Ask your preparer, in writing, which of the three positions your return already takes for employer contributions, employee contributions, and internal growth. Most olim have never asked.
- Keep the annual shekel statement for every vehicle, plus the Bank of Israel rate you used16. Basis is only provable with contemporaneous records.
- Stay consistent across years. Consistency matters more than which position you pick, because inconsistency is what produces double taxation.
- Handle the reporting separately from the argument: Form 89386, the FBAR8, and Form 8621 where pooled funds are visible9.
What do newcomers get wrong here?
Five errors that recur
- Reading "the treaty covers pensions" as covering contributions. Article 20 defines itself as being about periodic payments after retirement1. Money going in and money compounding are simply not in the document.
- Assuming the 10-year new-resident exemption helps. That relief covers foreign-source income, and an Israeli pension is Israeli-source, so it does not reach this. Separately, from 1 January 2026 the exemption becomes reportable while remaining untaxed for affected years15.
- Treating a keren hishtalmut as a pension. Its Israeli relief on a qualifying withdrawal has no US equivalent14, so a payout Israel does not tax can still be fully taxable on your US return.
- Ignoring the employer contribution because it never reaches your bank. Under two of the three positions it is current compensation in the year it is credited, whether or not you saw it.
- Assuming the wrapper hides what is inside it. If the wrapper is treated as transparent, the pooled sub-funds become visible and Form 8621 follows9.
Check your understanding
An American oleh's preparer says the US-Israel treaty makes his keren pensia tax-deferred, citing Article 20. What is wrong with that reasoning?
Look at two things: what Article 20 defines itself as covering, and what Article 6(3) does to it for citizens.
There is no published answer, and that is the honest position. The US-Israel income tax convention was signed on 20 November 1975 and took general effect on 1 January 1995. Its only private-pension article, Article 20, defines itself as covering periodic payments made by reason of retirement, and the treaty contains no article on pension schemes, no relief for contributions, and no deferral of tax on income accruing inside a scheme. Article 6(3) further lets each state tax its own citizens as if the convention had not come into effect, and the Article 6(4) exception list does not include Article 20. So for a US-citizen oleh the deferral of an Israeli keren pensia, bituach menahalim, kupat gemel or keren hishtalmut is a position a preparer takes rather than a rule to look up. A British oleh faces none of this, because the UK stops taxing foreign income once you are non-resident.
It does not say. The convention signed on 20 November 1975 contains no article on pension schemes, no relief for contributions paid into a scheme in the other state, and no deferral of tax on income accruing inside one. Its only private-pension article, Article 20, defines its subject as periodic payments made by reason of retirement, which is a rule about payouts rather than build-up.
Because of the saving clause. Article 6(3) lets a Contracting State tax its residents and its citizens as if the convention had not come into effect, and the exception list at Article 6(4) preserves only Articles 10, 21, 26, 27 and 28. Article 20 is not among them, so for a US citizen the pensions article is effectively switched off while Relief from Double Taxation under Article 26 survives.
Because the UK taxes on residence and the US taxes on citizenship. UK guidance states that non-residents do not pay UK tax on their foreign income, with residence decided by the Statutory Residence Test. Once a British oleh is non-resident, her Israeli pension is an Israeli matter and there is no second tax authority with a view on the build-up to reconcile.
Deferral respected, where nothing is picked up annually and the whole payout is taxable later with a foreign tax credit. Split treatment, where the employer contribution is current compensation but the growth stays deferred. Fully transparent, where contributions and internal growth are income each year, building US basis at the cost of tax on money you cannot access.
Yes. The IRS states that an interest in a foreign pension or deferred compensation plan is reportable on Form 8938 once your specified foreign financial assets exceed the threshold that applies to you. The FBAR is separate, due when non-US accounts exceed 10,000 USD in aggregate at any time in the year, and filing one form does not relieve the other.
They can, because Israeli retirement vehicles invest through pooled sub-funds and a non-US pooled fund is a PFIC for a US person, reported on Form 8621 under a default section 1291 regime with an interest charge. The Form 8621 filing exception lists US-code arrangements such as section 403(b) and 457(b) plans and section 7701(a)(37) individual retirement plans. An Israeli keren pensia is not one of them.
Form 8833 discloses a treaty-based return position under Internal Revenue Code section 6114, and such a position needs a treaty provision to rest on. The US-Israel convention has no pension-scheme or contributions article, so there is nothing to point at for the build-up question. That absence is why the deferral question is settled by professional judgement rather than by disclosure.
No. The oleh exemption covers foreign-source income, and an Israeli pension you are accruing from Israeli employment is Israeli-source, so it falls outside the relief entirely. Separately, from 1 January 2026 the exemption becomes reportable while remaining untaxed for affected years, so olim relying on it should expect a reporting duty even where no tax arises.