If you have established a financial plan, set up your 401(k) or IRA and are regularly contributing, but want to diversify to limit post-retirement taxes, then a 7702 plan may be right for you. This flexibility makes 7702s a good option for high-income earners who have maxed out on other retirement vehicles and need a place to stash their cash. There are no early-withdrawal tax penalties (withdraw up to the amount paid in premiums at any time, tax-free) and no limitations on how you use your money or how much you fund your policy. They are more flexible and accessible than, for instance, 401(k) s and IRAs. Funded with after-tax dollars, 7702s grow tax-deferred. You can use 7702 plans as part of a balanced portfolio, accessing similar tax-free income benefits to a Roth IRA.
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Specifically, it’s a cash value or variable universal life insurance policy (VUL) policy. It’s an insurance policy named for Section 7702 of the US tax code. Thus, a 7702 is not a retirement plan per se. Finally, it establishes a test for life insurance designed to ensure that traditional investments do not masquerade as life insurance in order to receive favorable tax treatment. It also places limits on premiums and tax benefits for life insurance.
IRC 7702 CODE
The Internal Revenue Code (IRC) 7702 clarifies the federal government’s definition of a life insurance contract and how it is taxed. But when some companies created life insurance products with significant investment features that offered tax benefits, the federal government intervened to revise the tax code.
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The primary purpose of life insurance is to provide your family with a tax-free death benefit in the event of your death. It provides a tax-free income resource and creates a legacy for your beneficiaries. In other words, if you can’t put any more money in your 401(k), IRA, or Roth IRA and want to increase the cash value inside your retirement portfolio, a 7702 is one way to diversify. It’s a life insurance policy that augments the death benefit protection with an investment vehicle that has relatively little risk and no tax penalties for early withdrawal.Īs a physician with long-term earning ability, you may find several advantages to making a 7702 plan part of your portfolio for retirement, especially if you have maxed out your contributions to other plans. One tax minimization strategy for retirement is the 7702 plan, which you fund with after-tax dollars.
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IRC 7702 HOW TO
While we tend to focus on ways to minimize taxes while we’re working, it’s also important to consider how to make retirement less taxing.