Today's decision cleared the way for Lt Gen Gabi Ashkenazi to enter politics.
Ashkenazi had been caught up in a scandal surrounding the appointment of his successor in 2010.
Several Israeli media outlets have reported that Ashkenazi may be considering a move into politics, but he has not publicly voiced any political aspirations.
Ashkenazi took command of Israel's embattled armed forces in the wake of an inconclusive month-long war against Lebanon's Iran-backed Hezbollah militants in 2006.
He stepped down in 2011 after a tenure marked by high public approval ratings but tensions with former Defense Minister Ehud Barak.
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