Last Updated on July 14, 2024

The information contained in this article is for general educational purposes and should never be viewed as specific investment, tax, or legal advice.

A newborn child could have 65 or more years until retirement. That means potentially having decades for these investments to grow and compound. Anyone reading this article can’t compete with that. Time is the magic ingredient that can turn a relatively tiny investment into a serious fortune and kids have a lot of it.

Obviously, investing for your children or grandchildren is rarely recommended if you are not taking care of your own financial needs first. Paying off high-interest debt, for example, should certainly come before putting away money for your kids. If you are financially ready to start investing a small amount for your child, how do you get started?

This article will focus on 3 main categories: Using Israeli savings options, setting up an account in the parent’s name, and using US based custodial accounts (for US citizens).

Define your goal

As with all financial planning, defining your goals first will likely lead to a better plan. When it comes to saving and investing for our kids’ future, what is the main reason you’re setting aside this money today? Here are some of the most common goals we see to help you start thinking this through:

1. To build wealth in general – give yourself the ability to help your kids in the future with whatever they might need (Downpayment, wedding, etc.)
2. Hands on education – an account for your child to develop real hands on skills and practical investment experience.
3. Grow the child’s own money – invests family gifts, birthday presents, Chanukah gelt, etc.

These may also sound important but by identifying your primary goal, the choices below may become easier to process.

Israeli savings options for children

Let’s start by analyzing the local options (specific limitations for US citizens will also be discussed).

Israeli investment funds

A common investing tools in Israel that can be used to invest in your kids names are known as Kupat Gemel Lehashka’a (קופת גמל להשקעה) and an Insurance Savings Policy (פוליסת חיסכון). We discussed these options in much more detail, here. Essentially, these are professionally managed Israeli investment funds which offer a choice of different tracks (מסלולים) based on your risk tolerance – similar to your Israeli pension fund or Keren Hishtalmut. 

These are widely considered bad choices for Americans because of that same PFIC issue in addition to their high fees. If you and your children are not American, you can speak to any Israeli insurance agent about how to set one up. It is also important to be aware that you can often achieve the same outcome with much lower fees just by investing in an index fund through a brokerage account.

Consider for goal 3

A guardian account (חשבון אפוטרופוס) at an Israeli brokerage

Meitav and IBI are the two Israeli investment houses that offer the ability to open a custodial account on behalf of a minor. To open an account you are generally required to physically arrive at their offices or have an Israeli lawyer sign documents on your behalf and mail them in.

Another con of opening this type of account is that it requires a minimum of 10-15k NIS. In addition, keep in mind that the child will receive full control over this account when he/she turns 18 and be able to do whatever they wish with it.

If you are a US citizen, take note that Israeli brokerages generally have higher fees and can introduce some complexity with your US tax reporting obligations. Learn more, here.

Consider for goals 2 & 3

Opening an Israeli bank account

Most Israeli banks offer the ability to open an a bank account for your teen that is attached to your account until the age of 18. Some banks will open an account for those as young as 14 while others may have older age requirements. Obviously, funds sitting in the bank aren’t likely to make much interest and are likely to lose value to inflation.

The government savings plan for every child (“חיסכון לכל ילד“)

You may already be doing some saving or investing for your child! As of 2017, Bituach Leumi began depositing money each month on behalf of every Israeli child under 18. Parents are able to choose between different savings or investment tracks on behalf of their child. See our full guide on How to choose your Child Savings Plan.

A separate investment account in the parent’s name

One of the simplest options for opening a new investment account with your kid in mind is to open a seperate account in your name and use that account to invest on a child’s behalf. You can then eventually gift those assets to that child once they reach adulthood at the time the parents choose. This option allows the parents to retain full control of the account and decide when the child is financially mature enough to receive this gift.

In this scenario, the parents have all the same options around choosing an investment platform as they would if they were choosing one for themselves – see our full guide: “US vs Israel brokerage” for more information on choosing which one is right for you. As with any other taxable account, all income earned (dividends, interest, capital gains) will be subject to tax.

While Israel generally does not impose a specific gift tax, there still may be some Israeli tax implications in specific circumstances. For example, Israel may impose tax on any unrealized gains in the account at the time the assets are gifted if the child is no longer an Israeli tax resident. In other words, if the kid doesn’t live in Israel (and you do), the gift will likely be treated as a sale and all the profits will be taxed.

Consider for goals 1 & 2

US Citizens using this option

Before using this option, US citizens need to be aware of the basics around US gift tax limits. Currently, the lifetime gift tax exclusion is extremely high (13.61 million dollars, set to halve in 2026) and is therefore not a significant limitation for most people investing for their children with the intent of gifting the child the account in the future. But, without the ability to predict what the US congress will do in the future around gift tax limits and exemptions, there is some risk that this could be significantly reduced in the future.

In addition, keep in mind that filing a federal gift tax return will likely be required in the year that you gift the account to your child if the value of the assets in the account exceed the US annual gift tax exclusion ($18,000 per individual in 2024).

For a more thorough understanding of investment options in this category, see our full article “What Americans in Israel can and can’t invest in“

Using US custodial Accounts

There are many different options for setting up a US based account for your child, each with different pros and cons and lots of complications. While some of the different tax considerations will be mentioned, it is important that you get personal tax advice based on your individual circumstances – these issues can be complex.

UTMA/UGMA Accounts

Traditional US custodial accounts for minors (UTMA/UGMA) are governed differently by each state and are therefore not offered by US Brokerages to non-US residents. Some American Olim, looking specifically to open an account in their child’s name, tend to rely on 1 of 2 potential solutions in order to open or maintain an account on a child’s behalf after Aliyah:

1. Keeping a US address after Aliyah and using that address to open a UTMA/UGMA custodial account
2. Having a trusted family member who is a US resident open the custodial account and serve as the custodian/trustee

In each situation, it is advisable to consult with an accountant as your specific circumstances could change pros and cons of each option. Like any taxable brokerage account, taxes will be owed on any income generated in these accounts. Some of the tax implications to consider include:

• A separate US tax return may need to be filed on behalf of the child if the child earns more than $1,100 in income in the account
• Maintaining a taxable non-Israeli brokerage account (after the Aliyah 10 year tax holiday) could trigger the need to file an annual Israeli tax return. In some situations this could be a significant additional expense if the family would have no other reason to file Israeli taxes otherwise.

Keep in mind that the custodial account will legally belong to the child named on the account once he reaches the State’s legal age of adulthood, usually between 18-21. At that time, the assets will need to be transferred to a regular brokerage account and the child will have full legal control over the assets.

Once you have considered all of the above, opening a UTMA/UGMA account can be done easily at all major US brokerages. As of 2023, up to $17,000 per individual (or $68,000 from one couple to another couple) per year can be contributed to a child’s account without paying gift tax on those contributions.

Consider for goals 2 & 3

Series I Savings Bonds

Another option is to open a Treasury Direct minor account for your child and buy Series I Savings Bonds. Series I Savings Bonds are 30-year bonds issued by the United States Federal Government with an interest rate that goes up or down based on US inflation. Because they are issued by the federal government and essentially built to compensate you for inflation of the dollar, they are considered by most to be almost risk-free.

Once the minor reaches age 18, you are restricted from performing nearly all transactions in the account, however, you can still purchase securities on the child’s behalf and maintain the existing bonds. Purchasing these requires a US bank account.

Trusts

Trusts are another tool often used for someone looking to put aside significant assets on behalf of a child and retain more control over when/how the child receives these assets. The downside of trusts is that they can be extremely complex from both a legal and tax perspective and may be costly to set up.

If you are making Aliyah with a trust or looking to set up a new trust – on behalf of a child or as part of an estate plan – it is important to seek proper legal and tax advice from someone who understands the laws in both countries. For general information about Israeli Trust law, read more here. All major US brokerages offer accounts for US domiciled trusts.

Custodial IRAs

Setting up an IRA on behalf of a working child is great way to get an early jumpstart on retirement savings. In a situation where the minor is earning taxable income (for example a summer job), the parents could match the child’s earning up to the annual limit and gift funds directly to the child’s IRA. The significant tax penalties on withdrawing these funds before retirement is an added incentive for the child not to interfere with these investments once the child takes possession of the account at the age of 18. The Roth IRA (as opposed to the traditional IRA) can be especially attractive because of the potential for decades of tax-free growth.

Unfortunately, after Aliyah, contributing to these types of accounts can be far more complex and is discouraged by many Israeli accountants. Some children working and paying taxes in Israel may not be eligible to contribute to a US IRA if their income is excluded using the FEIE and they may not benefit from the deduction when contributing to a traditional IRA. Additionally, a Roth IRA according to Israeli tax law is very much a grey area and the “tax-free” status on withdrawals is far from certain for an Israeli resident.

Contributing to your own Roth IRA

Funding a Roth IRA can be a great way to contribute towards your own retirement while also potentially setting aside money for your kids.  Because funds in a Roth grow tax-free (in the US) and have no Required Minimum Distributions it can be used for both goals. In other words, since you aren’t required to withdraw funds from the account, you can “save it for last” and only take money out if you need it during retirement. Any money leftover in the account after death can pass directly to the beneficiaries listed on the account. 

As mentioned above, funding an IRA (Roth or traditional) after Aliyah is generally discouraged because of uncertainty in the Israeli tax code.

529, ESA and HSA Plans

A 529 and ESA plan in the US are popular tax-advantaged ways to save specifically for a child’s education. An HSA is a tax-advantaged way to save for future healthcare needs. These account types are potentially much less advantageous for Olim or those considering Aliyah for two main reasons:

1. Tuition and healthcare in Israel are generally far less expensive than in the US
2. The Israeli tax authority may not recognize these accounts as tax-qualified and treats them as regular investment accounts for reporting and tax purposes. This means that the key advantage of these accounts, tax-free growth, may be sacrificed after an Oleh’s 10 year tax holiday has concluded.

If you are making Aliyah with any of these accounts, it is a good idea to speak with an Israeli accountant familiar with these plans before your 10 year tax holiday comes to an end for potential tax planning opportunities.

Lost?

We know that so many people find this subject overwhelming. While we try to ensure that all our articles are as comprehensive and practical as possible, we understand that many need more support. That is why we built our online guided investment program, specifically for English speaker in Israel. The program includes everything you needs so your don’t get stuck with step-by-step guidance on building and implementing an effective investment plan for you and your children.