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Will the IRA Accounts Play a Central Role for Israelis? 

Teddy Lin – CEO and Co-Founder at GlobalNET Gemel. (courtesy)
Teddy Lin – CEO and Co-Founder at GlobalNET Gemel. (courtesy)

What Is an Individual Retirement Account (IRA)?

IRA Accounts are a long-term savings vehicle in Israel that allows clients to manage their retirement assets independently or with an advisor. In Israel, you call “rollover” all liquid retirement assets or education funds into an IRA account. 

Once you are in an IRA account you can choose your investments aligned with your personal needs or mandate a manager to manage a personal; account for you. 

Lately, clients who are tired of exposure to market volatility have been transferring their accumulations into IRA accounts and investing in funds that are not correlated to markets such as income creating real estate funds.  

There are significant advantages to having an IRA account:

  • Tax Planning 
  • Transparency 
  • Exposure to alternative investing 
  • Ability to react to market volatility 

Lately, there has been significant interest in the IRA “option” and the Overall Market has Grown by 33% in the last year.  

In Feb 2017 there were 3.9 billion ILS in IRA accounts, in July 2019 this had grown to 8.5 billion ILS and in April 2022 this was already 15 billion ILS. 

In the first quarter of 2021, the balance of the public’s financial assets portfolio increased by about NIS 129 billion (2.9 percent) to about NIS 4.5 trillion. The share of the public’s financial assets portfolio relative to GDP increased by 8.6 percentage points, to 326 percent at the end of the quarter. The increase is attributed to growth in the portfolio balance, which was partly offset by a slight increase of 0.2 percent in GDP.

The Total market for Pension and provident funds in Israel in April 2021 was 2.175 trillion ILS of which 1.009 trillion is in Pension Funds, 622 billion was in provident funds, and 543 billion in Insurance Funds. 

IRA is 0.25% of all retirement assets in Israel and less than 2% of all provident fund assets. 

What is the future of IRA investing in Israel and what can we learn from the US? 

In research published by ICI in January 2021, the three most common primary reasons for rolling over into an IRA account in the US were not wanting to leave assets with a general manager, wanting to preserve the tax treatment of the savings, and was to access more no traditional investment options.

IRA Accounts in the US 

IRAs Play an Increasingly Important Role in Saving for Retirement in the USA With $10.8 trillion in assets at the end of the second quarter of 2020, individual retirement accounts (IRAs) represented 34 percent of US total retirement market assets, compared with 23 percent two decades ago. 

IRAs have also risen in importance on household balance sheets. In June 2020, IRA assets were 11 percent of all household financial assets, up from 8 percent of assets two decades ago. In mid-2020, 47.9 million US households, or 37.3 percent, reported that they owned IRAs. Among all IRA-owning households in mid-2020, more than eight in 10 also had employer-sponsored retirement plans; they had defined contribution (DC) plan balances, current defined benefit (DB) plan payments, or expected future DB plan payments. Another 27 percent of US households reported employer-sponsored retirement plan coverage but no IRAs. All told, about 82 million US households, or 64 percent, had some type of formal, tax-advantaged retirement savings.

What is the Future of IRA Accounts in Israel? 

In Israel, the capital market published a new directive for provident funds that requires all managers to offer an index-only track option. Clients can implement this already today in an IRA with management fees that are half of the market average. 

The danger for families investing in bonds and wanting to achieve life goals is also imminent. From the beginning of this year, the global bond index was down more than 12%. In Israel, as of 22 May 2022, the Government bond index was down 6.15% vs Tel Aviv 35 which was down only 4.47%. In the US the US treasury long-term government bonds were down 20% as opposed to the S&P which is down 18.1%.   

This too will increase demand for IRA accounts. 

In preliminary reports from 2022, there is continued significant growth in the sector and more and more retirement clients (who are 85% of total accumulations in Israel) are choosing to transfer all or part of their assets into a retirement account. This is mostly fueled by families’ needs to control their destinies and distance themselves from market volatility and invest in more nonmarket correlated asset classes that create income. 

Israel tends to copy the US market where 40% of all accumulations are in IRA accounts. If this happens 870 B ILS will be managed in IRA accounts. 

The article was written in collaboration with Teddy Lin – CEO and Co-Founder at GlobalNET Gemel.

About the Author
Dan Dobry was the founder of the Union of Financial Planners in Israel (UFPI), served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and from January 2019 is a member of the Committee for Standards and Qualifications for the European Union (SQC).
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