by I. David Waxman, EA
What is an IRA?
A Traditional Individual Retirement Account (IRA) allows taxpayers to set aside funds for retirement on a tax-deferred basis. Contributions are often deductible, and the funds grow tax-free while inside the account. When the taxpayer reaches retirement age, yearly withdrawals—called distributions—are taken to cover living expenses. These distributions are taxable income, but ideally at a lower rate since retirees usually have less earned income.
Congress created IRAs to supplement Social Security, recognizing that government benefits alone would not adequately cover retirement needs.
A Brief (and incomplete) History of IRAs and RMDs
- 1974 – ERISA (Employee Retirement Income Security Act)
The first IRAs are introduced for workers without employer-sponsored retirement plans. Codified in IRC §408. - 1981 – ERTA (Economic Recovery Tax Act)
Eligibility expanded to nearly all workers, even those with workplace pensions. - 1986 – Tax Reform Act
Introduction of Required Minimum Distributions (RMDs). To ensure that deferred income would eventually be taxed, the government required retirees to start pulling money out once they reached a certain age. - 1997 – Taxpayer Relief Act
Creation of the Roth IRA (named after Senator William Roth of Delaware), codified in IRC §408A. Unlike traditional IRAs, Roth contributions are made after tax, but distributions are tax-free—and no RMDs apply during the original owner’s lifetime.
Tax Considerations for U.S. Citizens Living in Israel
1. During the 10-Year Aliyah Tax Holiday
New Israeli residents may enjoy a ten-year exemption from Israeli tax on foreign-source income.
- Traditional IRA: Report distributions on your U.S. tax return (Form 1040). They remain taxable at normal U.S. marginal rates.
- Roth IRA: Distributions are tax-free in the U.S., and Roths are not subject to RMDs.
2. After the 10-Year Holiday
Once the Israeli exemption expires, taxation shifts:
- Traditional IRA: Israel taxes the distributions under Section 9(3) (“teisha gimel”). Importantly, Israeli tax should not exceed the U.S. tax that would otherwise apply. A U.S. tax preparer and Israeli accountant must coordinate to balance Form 1040 and foreign tax credit reporting.
- Roth IRA: A gray area. Some Israeli accountants treat Roths as exempt under teisha gimel; others don’t. See further discussion here: Roth IRA in Israel – Blue & White Finance. Planning and professional advice are critical.
3. Inherited IRAs
Israel does not impose estate or inheritance tax. The IRA’s value at the date of death becomes your tax-free basis. However, Israeli accountants use two different approaches to calculating the taxable portion:
- Basis method – All distributions are tax-free until the original basis is exceeded.
- Annual income method – Each year’s investment income (interest, dividends, gains) is treated as taxable.
The basis method is simpler and defers taxation, but practices vary.
- Inherited Roth IRAs: No annual RMDs apply, but under U.S. law the entire Roth must be fully distributed within 10 years of the original owner’s death. During that 10-year period, beneficiaries face the same gray area with Israeli taxation as with regular Roths — some accountants treat the distributions as exempt under teisha gimel, while others do not. Careful planning with your tax team is essential.
Social Security Benefits
Here’s some good news for USA Olim. One important point for retirees in Israel is that U.S. Social Security benefits are completely tax-free in both countries. Under the U.S.–Israel tax treaty, these payments are exempt from both USA and Israeli taxation. In addition, the passage of the Social Security Fairness Act (H.R. 82) permanently removed the Windfall Elimination Provision (WEP) penalties, meaning that Americans who also have Israeli pension income will now receive their full Social Security benefit without reduction.
This makes Social Security a uniquely favorable income stream for U.S. expats in Israel compared to IRA distributions, which often involve more complex tax coordination.
How Are RMDs Computed?
- Roth IRAs
No RMDs apply during the account owner’s lifetime. The IRS does not force distributions since it receives no tax revenue. Exception: beneficiaries who inherit a Roth must fully distribute the account within 10 years of the original owner’s death (under the SECURE Act). - Traditional IRAs
RMDs are based on your account balance and life expectancy, as published in the IRS Uniform Lifetime Table. Each year’s RMD is calculated by dividing the prior year-end balance by the life expectancy factor.- For retirees: RMDs begin at age 73 (as of 2023, under the SECURE 2.0 Act).
- For inheritors: Post-2019 rules generally require beneficiaries to withdraw the entire balance within 10 years of the decedent’s death. In addition, if the decedent had already begun RMDs, the beneficiary must continue taking annual RMDs during the 10-year period. Certain “eligible designated beneficiaries” (such as spouses, minor children, or disabled individuals) are allowed instead to stretch distributions over their lifetime.
✅ Worked Example – Retiree at Age 73
- Facts:
- IRA balance on Dec 31, 2024 = $500,000
- Age in 2025 = 73
- Life expectancy factor from IRS Table = 26.5
- RMD Calculation:
$500,000 ÷ 26.5 = $18,868 - Result:
The retiree must withdraw at least $18,868 in 2025 as an RMD.- If it’s a Traditional IRA, this amount is taxable income.
- If it’s a Roth IRA, no RMD applies at all.
✅ Worked Example – Inherited IRA (10-Year Rule, 2025 Death)
- Facts:
- Mother dies in June 2025 at age 90.
- IRA value at death = $300,000.
- Beneficiary is her only child, age 60.
- Beneficiary is a non-spouse adult child → 10-year rule applies.
- Rule:
The beneficiary must withdraw 100% of the IRA by Dec 31, 2035. Because the decedent (the mother) had already reached her Required Beginning Date, the child must also take annual RMDs during the 10-year period. - Annual RMD Calculation (first year, 2026):
- Value as of Dec 31, 2025 = $300,000.
- Beneficiary’s life expectancy (age 60, Single Life Table) = 25.2.
- RMD =
$300,000 ÷ 25.2 = $11,905
- Result:
- In 2026, the beneficiary must withdraw at least $11,905.
- Each following year, the divisor is reduced by 1 (so 2027 divisor = 24.2, etc.).
- By the end of 2035, the account must be fully depleted — regardless of whether the annual RMDs alone would have done so.
This creates a two-part obligation:
- Take annual RMDs each year, and
- Ensure the account is completely emptied within 10 years.
Key Takeaway for Expats
For retirees, RMDs begin at age 73. For inherited IRAs, the rules depend on who inherits and when. In the case of an adult child inheriting from a parent who had already started RMDs, the child must:
- Take annual RMDs based on their own life expectancy, and
- Fully distribute the account by the end of year 10.
This dual requirement makes planning essential, especially for U.S. citizens living in Israel who must balance both U.S. and Israeli tax obligations. Coordinated planning between your U.S. and Israeli tax advisors is the best way to avoid double taxation and optimize retirement distributions.
Disclaimer
This article is provided for general informational purposes only. While we strive for accuracy, there may be errors or omissions. Nothing here should be considered financial, legal, or tax advice. Each individual’s situation is unique, and you should consult with qualified U.S. and Israeli advisors before making any decisions regarding your retirement accounts.