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Working and at the Same Time Receiving Pension with Exemption

Working and at the Same Time Receiving Pension with Exemption

Have You Reached Retirement Age (62 for a woman, 67 for a man) and Are Still Not Receiving Your Pension? This Article is for You.

You have reached retirement age and yet you are debating…

On the one hand, you want to keep working.

On the other hand, it is tempting to start receiving a pension.

There is one term worth getting to know.  It is “Artificial Retirement”.

This is a relatively simple tax plan that will allow you to continue working, start receiving a pension with an exemption and still give you the ability to reserve an exemption on your future retirement pension from your employer once leaving your workplace.

So, what is “Artificial Retirement”? How do you do it? For whom is it suitable? Answers to these questions and more are in the following article.

At what age can you start receiving a pension?

In most cases, it is possible to receive the pension from the age of 60, but an exemption on the pension can only be obtained from retirement age – age 62 for women and age 67 for men.

What is “Artificial Retirement”?

An Artificial retirement is a request to receive a pension while at the same time, continuing to work for the employer.

After receiving the first pension and reaching retirement age, it is possible to perform “Fixation of rights” and start receiving an exemption on the pension while continuing to work for the employer.

How can I start receiving a pension if I keep depositing into the fund and keep working?

In new pension funds and in senior employees’ insurance, in most cases, the providence components of the pensions must be requested, while the severance package components will remain in the fund until the end of the work period. There is no such limit in the old pension funds and in the budgetary pension fund.

During the post artificial retirement, while still working, deposits will continue to be made to the fund (sometimes to a new fund) and they will be able to be transferred into an additional pension in the future at retirement.

What is “Fixation of rights” and what is the special emphasis regarding the fixation of rights in Artificial retirement?

Every person who reaches retirement age is entitled to an exemption basket of approximately 800,000 NIS, which can be received as a monthly exemption or as an exemption for withdrawing a lump sum.

In fixation of rights, the retiree submits a one-time request to the Income Tax Authority.  In this request, the retiree chooses how to divide the exemption basket between three different types: Exemption for a severance package, Exemption on a monthly pension, and Exemption on “Hivun Kitzba” (receiving an accumulated pension as a lump sum instead of receiving it as a monthly pension).

The fixation of rights is set on Form 161D. To go to the form, click here.

There is a special emphasis on fixation of rights in the event of an artificial retirement and it is in a professionally guided use of the exemption basket:

While the “classic” retiree first takes advantage of the exemption on the severance package and then uses the balance of the exemption on the pension funds, the “Artificial” retiree chooses to first take advantage of the exemption on the monthly pension funds while reserving future exemption on a severance package that he/she will receive once stopping to work for the employer.

Performing proper fixation of rights after an artificial retirement can save tens of thousands of shekels a year and hundreds of thousands of shekels over a lifetime from the date of retirement.

Illustrating Example:

Tamar, 62, works as an employee with an income of 20,000 NIS and wants to start receiving a pension while continuing to work.

The pension fund allows her to receive a monthly pension of 4,000 NIS (Tamar’s marginal tax bracket rate is 31%).

As part of the fixation of rights, Tamar will be able to calculate an exemption of approximately 3,800 NIS per month and reserve a future exemption for a severance package of 100,000 NIS.

Accordingly, Tamar will pay tax on only 200 NIS (instead of paying on the full pension amount which is around 3,800-4,000), and the tax on the rest of the pension will be exempt (free)!

The following is the way she will also be able to save money every month: 3,800 *0.31 = 1,178 NIS. She will also enjoy an additional gross income of 4,000 NIS with a future exemption for a severance package.

If Tamar would not have started receiving the pension now, part of her exemption basket would have been wasted or used on a lower tax bracket rate of 14% (marginal tax on pensions only, without a salary) instead of 31%.

What are the advantages of receiving a pension while continuing to work?

  • Taking advantage of the time value of money: benefiting from savings funds at an earlier age and over time.
  • Utilizing a tax benefit: Using an exemption on pensions when the tax rate (bracket) is higher leads to greater savings and a higher net pension each month.
  • The possibility of reducing the number of working hours and maintaining the same standard of living by supplementing the income from the pension fund.
  • Benefit from a new exemption basket starting from the age of retirement for future retirement from the employer.

However, it should be taken into account that the longer you wait to receive the pension, the higher the monthly pension will be since it is spread over fewer months.

How does Artificial Retirement affect American citizens?

American citizens must report all of their income, from Israel and abroad, to the U.S. tax authorities.

The IRS does not recognize artificial retirement and any exemption on pension or an exemption on severance package money.

These funds constitute a taxable income in U.S. law and must be taken into account in retirement tax planning.

For American citizens who wish to perform an artificial retirement or an ordinary retirement, it is worth examining the balance of the transferred credits available to them and the expected U.S. tax implications when receiving the pension and severance package.

Examining only Israeli taxation aspects can lead to a “tax accident” on the American taxation side.

The Retirement Department in our firm, led by CPA Hai Bahalul, includes Israeli and American accountants. The department is prepared to assist you with patience, a smile, and professionalism in any matter related to retirement and pension tax planning.

For questions, advice and to arrange a meeting on zoom, please call 02-9992104 ext 643, or send an email to [email protected]

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