When searching for a remarkable retirement plan to leverage, most people choose to go with the 401(k) plans and various other individual retirement accounts (IRAs). But have you ever heard about the 7702 plan. Marketed as a vehicle to withdraw funds without incurring tax penalties, a 7702 plan sounds like a flexible retirement plan.
That leaves many wondering why 7702 plans aren’t widely used. The answer lies in what the 7702 plan really is and how does it differ from traditional retirement funds! Fret not since we are here to help clear some of the doubts you might already be having.
Named for a section in the Internal Revenue Code (IRC) a 7702 plan is merely a life insurance policy that can be leveraged for certain tax benefits. Under Section 7702 of the IRC, the federal government clearly lays out the parameters by which life insurance policies that build cash value are taxed.
In most cases, these policies happen to be variable universal life insurance policies. Any contributions made to these policies grow-tax deferred and can be invested in different accounts. Actually, they don’t have age restrictions on withdraws. Things tend to be different with a 7702 plan since it is not a retirement fund and shouldn’t be regarded as a replacement for a 401(k)-retirement account, IRA or savings account.
The good thing about leveraging a 7702 plan is that there is growing value on a tax-deferred basis. As the investments comprising your 7702 plan grow in value, you don’t have to pay taxes on your earnings. Furthermore, you can borrow against your 7702 plan in retirement without paying any taxes.
Bear in mind you might lack transparency regarding plan contributions. Motivated insurance agents receive significant commissions on the sale of these policies and will sometimes misrepresent the facts.
It is in your best interest to work with a licensed advisor who has a fiduciary responsibility to you as a client before taking advantage of the 7702 plan. That way, you can be sure their recommendation is in your best interest rather than merely trying to sell you a product just to earn a large commission.
