By Ariel Gold
Most people spend decades saving for retirement. They carefully build their pension, invest for the future, and think about how to earn the maximum before they stop working. When we review retirement plans for our clients, we review government pensions including Bituach Leumi and Social Security pensions, which are usually tax free, private pensions and investments in order to evaluate whether they are ready or on course for retirement.
The Retirement Decision That Can Save Thousands
Deciding on how much to take out as a monthly annuity versus leaving larger amounts invested is a critical element of the process. Especially when the tax consequences can be so different. Unfortunately, many people who do not consult with professionals miss out on a major planning decision and it can cost them for the rest of their lives, as much as tens or even hundreds of thousands of shekels.
That decision is called Kibua Zchuyot (literally, “fixing” or “establishing” your retirement rights). This election is made by filing Israel Tax Authority Form 161D, which determines how you will use one of the most valuable retirement tax benefits available under Israeli law. Because this decision is generally a one-time election that cannot easily be changed, it’s worth taking the time to understand your options before filing the paperwork.
What Is Kibua Zchuyot?
In general, individuals become eligible to complete Form 161D after reaching full retirement age when they begin to receive a qualifying pension, for example a monthly pension from their Keren Pensia.
Every eligible retiree is entitled to the same overall tax benefit: the ability to exempt a portion of their retirement savings from Israeli income tax. Kibua Zchuyot is the one-time decision about how to use that exemption. You can use the benefit to 1) either reduce the taxes on your monthly pension, 2) apply it toward a tax-free lump-sum withdrawal from your retirement savings, or 3) divide it between the two.
As of 2026, the exemption can shelter approximately ₪5,400 of qualifying monthly pension income from tax, or it can be applied toward a tax-free lump-sum withdrawal, depending on how you choose to use the benefit.
Which Option should you choose?
Option 1: Use the Entire Benefit to Reduce Taxes paid on Your Monthly Pension
For some retirees, the priority is maximizing monthly income. If your pension will be your primary source of retirement income and you expect to rely on it for many years, using the exemption to reduce the tax on your monthly pension may provide the greatest long-term benefit. The tax savings are monthly for as long as you receive your pension, maximizing a retiree’s income available throughout retirement.
Think of it as: “Give me a little more money every month.”
Option 2: Use the Entire Benefit for a Tax-Free Lump Sum
Others have different priorities. Instead of using the exemption to reduce tax on their monthly pension, they choose to apply it toward a tax-free withdrawal from their retirement savings account.
For example, their monthly pension may already comfortably cover their living expenses, but they prefer to access the additional funds tax free now. They may want to help a child purchase a home, renovate their own home, make an investment, or simply have greater financial flexibility during the early years of retirement. For these retirees, using the exemption towards withdrawing a tax-free lump sum of up to 976,000 nis from their pension savings account, may make more sense than increasing an already sufficient monthly pension.
It’s important to understand that the lump sum is not an additional government payout. The lump sum comes from one’s own retirement savings that may be withdrawn on a tax-free basis up to the allowable limit.
Think of it as: “Give me the tax benefit now instead of spreading it over my lifetime.”
Option 3: Split the Benefit Between Both
Many people find themselves somewhere between these two situations. They would like some money available today while also benefiting from lower taxes on their pension in the years ahead. In these cases, dividing the exemption between a lump sum and a monthly tax benefit often provides a balance between immediate flexibility and long-term maximized income.
Think of it as: “Some now, some later.”
There isn’t a universally “best” option. The important point is that Kibua Zchuyot isn’t about choosing the option that sounds best. It’s about choosing the option that best supports your retirement goals and plan.
Previous tax-free severance withdrawals may also affect the amount of exemption available, making it important to review your employment history before making your election.
Before You File
A few additional issues are worth reviewing before making your Kibua Zchuyot election.
Have you ever withdrawn tax-free severance pay
Previous tax-free severance withdrawals may reduce the amount of Kibua Zchuyot available to you in retirement. Reviewing your employment history before making your election is critical as earlier withdrawals will reduce the current tax benefit.
Have you already retired?
If you’ve already started receiving a pension but never completed Form 161D, you may still be able to file retroactively and claim a refund for taxes you overpaid. In general, refunds are limited to the previous six tax years.
Have you already filed your election?
Once a Kibua Zchuyot election has been submitted, changes are generally permitted only during the first 90 days. After that, the election is generally permanent.
The Decision Isn’t Just About Taxes
Although Kibua Zchuyot is often described as a tax decision, it’s really a retirement planning decision.
When we help clients evaluate their options, we review projected pension income, previous severance withdrawals, other retirement assets, expected cash-flow needs, family priorities, and long-term retirement goals before recommending a strategy.
Because every retiree’s situation is different, the best strategy isn’t necessarily the one that produces the greatest immediate tax savings. It’s the one that best supports your overall retirement plan and the life you want your retirement savings to provide. But you need to be educated enough to ask for the benefit or it simply will not be utilized.
A note for U.S. Citizens
If you’re a U.S. citizen living in Israel, Kibua Zchuyot deserves an additional level of planning.
The tax exemption is provided under Israeli law, but U.S. citizens remain subject to U.S. taxation on their worldwide income. As a result, the IRS may not recognize the Israeli tax benefit in the same way the Israel Tax Authority does.
Before deciding how to use your Kibua Zchuyot benefit, it’s advisable to consult a professional who understands both the Israeli and U.S. tax systems. A strategy that minimizes taxes in Israel may not produce the same result for U.S. tax purposes, making coordinated planning especially important.
At Labinsky Financial, we help clients approach retirement with clarity, careful planning, and a full understanding of the financial decisions ahead. From evaluating pension income and retirement assets to reviewing cash-flow needs, tax considerations, and long-term goals, we look at the complete financial picture. Decisions such as Kibua Zchuyot can have a significant impact on retirement income for many years, which is why we help clients understand their options, avoid costly mistakes, and make informed choices that support the retirement they want to build.
The Bottom Line
Retirement planning doesn’t end when you stop working. In many ways, that’s when some of the most important financial decisions begin. Kibua Zchuyot is completed only once, but the decision can affect your retirement income for decades. Taking the time to understand your options before filing Form 161D may be one of the most valuable financial decisions you make in retirement.