For US citizens residing in Israel, retirement planning can be complicated—especially when it comes to Individual Retirement Accounts (IRAs). The decision between a Traditional IRA and a Roth IRA affects not only US taxes but also potential Israeli taxation.
In this guide, MasAmerica’s tax advisors in Israel explain how IRAs are taxed in both countries, the best strategies for expats, and what to consider before contributing to or withdrawing from your retirement savings.
1. Understanding Traditional IRAs & Roth IRAs
| IRA Type | How Contributions Work | Taxation on Withdrawals | Best for… |
| Traditional IRA | Contributions may be tax-deductible on US taxes | Withdrawals in retirement are taxable as income | Those expecting to be in a lower tax bracket in retirement |
| Roth IRA | Contributions are not deductible but grow tax-free | Withdrawals in retirement are tax-free (if rules are met) | Those who expect to be in a higher tax bracket later |
For US taxpayers, Roth IRAs are usually better for long-term tax-free growth, while Traditional IRAs are good for short-term tax savings.
However, when living in Israel, there are additional tax considerations.
2. US Tax Rules for IRAs
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- Traditional IRA Contributions: If you earn US taxable income, contributions may be tax-deductible—lowering your taxable income for the year.
- Roth IRA Contributions: You must have earned income (wages, salary, or self-employment) to contribute.
- Withdrawal Rules:
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- Traditional IRA withdrawals before age 59½ trigger a 10% penalty + income tax.
- Roth IRA withdrawals are tax-free if the account is open for 5+ years and withdrawals happen after age 59½.
- Required Minimum Distributions (RMDs): Traditional IRAs require mandatory withdrawals starting at age 73 (IRS RMD Rules).
But how does Israel treat these accounts?
3. How Israel Taxes IRAs
For US citizens who have moved to Israel, IRA taxation depends on residency and how the Israeli Tax Authority (Mas Hachnasa) views these accounts:
✅ New Israeli residents & Returning Israelis:
- Israel offers a 10-year tax exemption on foreign income for new olim (immigrants) and certain returning residents.
- This means IRA withdrawals are NOT taxed in Israel during this period.
❌ After 10 years of Israeli residency:
- The Israeli Tax Authority may tax IRA withdrawals as regular income.
- Roth IRAs, which are tax-free in the US, may not be recognized as tax-free in Israel.
Key Considerations for US Expats
- If you plan to stay in Israel permanently, you may face double taxation on Traditional IRA withdrawals after 10 years.
- Roth IRAs, while tax-free in the US, could still be taxed by Israel after 10 years.
- Israel does not recognize IRAs as pension funds, meaning they don’t get the same tax treatment as Israeli pensions.
For more details, check the IRS guide on Roth IRAs.
4. Should US Citizens in Israel Choose a Traditional or Roth IRA?
Roth IRA is best if…
✅ You expect to stay in Israel long-term and want tax-free growth in the US.
✅ You qualify for the 10-year Israeli tax exemption and can maximize your gains early.
✅ You believe US tax rates will rise in the future, making tax-free withdrawals more valuable.
Traditional IRA is best if…
✅ You plan to move back to the US before retirement, so Israel won’t tax your withdrawals.
✅ You want immediate tax savings on your US tax return.
✅ You expect to be in a lower tax bracket when you start withdrawing funds.
5. Key Tax Strategies for US Expats in Israel
To maximize retirement savings and minimize taxes, consider these strategies:
A. Take Advantage of Israel’s 10-Year Tax Exemption
- If you’ve recently moved to Israel, this is a golden window to withdraw funds tax-free in Israel.
- You may want to convert a Traditional IRA into a Roth IRA during this time to lock in tax-free growth.
B. Convert Traditional IRA to Roth IRA (Roth Conversion)
- US expats who expect to stay in Israel long-term may want to convert to a Roth IRA before the 10-year tax exemption expires.
- This avoids future Israeli taxation on withdrawals.
C. Consider Israeli Pension Plans Instead of IRAs
- If you live in Israel long-term, Israeli pension plans (like Keren Hishtalmut or Kupat Gemel) offer local tax advantages.
- These may be better retirement savings vehicles than IRAs if you’re staying in Israel permanently.
6. US Tax Reporting for IRAs
Even if you live in Israel, the IRS still requires reporting for your IRAs:
| Form | Purpose |
| Form 8606 | Reports non-deductible Traditional IRA contributions and Roth IRA conversions |
| Form 5329 | Reports early withdrawals from IRAs and penalty exemptions |
| FBAR (FinCEN 114) | If your IRA is held in a foreign financial institution, it may need to be reported |
| Form 8938 (FATCA) | If total foreign assets exceed $200K, IRA balances may need to be disclosed (IRS FATCA Guide) |
Failure to report IRA activity properly can result in heavy penalties.
7. Final Thoughts: Choosing the Right IRA Strategy in Israel
For US citizens living in Israel, choosing between a Traditional IRA and a Roth IRA depends on:
- How long you plan to stay in Israel.
- Whether you qualify for Israel’s 10-year tax exemption.
- Whether you want immediate US tax savings (Traditional IRA) or tax-free withdrawals later (Roth IRA).
General Recommendation:
📌 If you plan to stay in Israel permanently, a Roth IRA is usually the best option to avoid double taxation.
📌 If you plan to return to the US, a Traditional IRA may offer better short-term tax benefits.
At MasAmerica, we specialize in US-Israel tax planning for expats. Contact us to discuss the best IRA strategy for your financial future.