When you’re considering retirement plans, the chances are good that someone is going to suggest a 702j retirement plan to you. They can sound very appealing, but is this the right choice for your future?
There’s a lot of different information to weigh when it comes to choosing a retirement plan. It can get confusing. Since 42 percent of Americans have under $10,000 saved for retirement, and many people don’t have access to 401k plans, you might consider turning to less-conventional ways to save for retirement.
A 702j retirement plan differs from standard retirement plans in some critical ways. It’s crucial to understand what these are, so you don’t get talked into making the wrong decision. Ready to make the best choice for your retirement savings?
What is a 702j Retirement Plan?
If you hear about a 702j retirement plan, you’re likely getting the information from an insurance salesman. These pitches can be aggressive and hard to turn down. However, the people selling 702j retirement plans often don’t make it clear what they entail.
Technically, a 702j plan isn’t a retirement plan at all. Although they’re generally marketed as retirement plans, this information is misleading. These are a type of life insurance policy.
The term “702j” comes from the Internal Revenue Code. Section 7702, which 702j comes from, governs life insurance. By definition, these can’t be retirement plans. However, companies that sell these plans go to great lengths to make people think of them as retirement plans, like 401ks and IRAs. If you don’t understand the difference between 702js and regular retirement plans, you might end up making a mistake.
A 702j is a permanent life insurance policy. It can’t be categorized as an actual retirement account. All real retirement plan choices are listed on the IRS website, which is an excellent place to learn more about the conventional plans you can choose from if you’re in the market. But what about the 702j plan? Let’s take a closer look at how this type of life insurance works.
Life Insurance and the 702j Plan
Permanent life insurance policies, like 702js, combine death benefits with a savings aspect. You’ll pay your premiums, just like with any life insurance policy. As time goes by, these premiums will also accumulate some cash value, and you can borrow against that amount.
The cash value grows tax-deferred, so you won’t need to pay taxes on that money. You can remove money from this cash value savings at any time, in the form of a tax-free loan.
That said, you need to be cautious with what you take out since it is a loan. If you can’t pay back the full loan amount before death, your death benefit gets reduced by the outstanding loan amount plus interest.
And, if you take out the policy’s full cash value amount as a loan, your policy will lapse. You’ll also have to pay a significant tax penalty.
Why do people spring for this type of life insurance policy? A lot of it has to do with misleading marketing. However, a 702j plan is a good choice at sometimes (more on those below).
The Truth About 702j Retirement Plans
Most 702j accounts are indexed or variable universal life policies. When you sign up for one, you’ll get a lot of information. Much of this information comes in “legalese” that’s hard for laypeople to understand. However, you’ll also get information that promises great return assumptions. These plans are advertised as “no-risk” plans since stock market losses won’t affect their value.
Is it too good to be true? For the most part, yes. Just because the stock market doesn’t affect the policy’s value doesn’t mean other things don’t affect it. Even if the account is doing well, the company will put a cap on the total amount that can be credited to your account.
Should You Get a 702j Retirement Plan?
A key part of the marketing pitch for a 702j plan is that these are life insurance policies, so they are taxed as life insurance, not as investments. That’s why your premiums grow your account with tax-deferred dollars each month, and your policy loans are tax-free. Your beneficiary also won’t have to pay income taxes on their death benefit (this is typical of most life insurance policies).
According to the 702j retirement plan concept, you should be contributing more than the minimum required premium payment into the account in your savings years. Then, you can withdraw some of those savings later with a tax-free loan. You might use the money to pay for retirement, pay your kids’ college, make a large purchase, or whatever else you need.
That creates another source of income when you’re retired. It can supplement Social Security, investments, pensions, or any other savings you have. 702j plans often work well for people who earn high wages and are likely to have high retirement incomes. Life insurance contracts aren’t counted as income when you’re retired, so this can potentially save you some money.
702j Plans and Taxes
A 702j plan won’t get counted toward your provisional income test, which determines how much of your Social Security can get taxed after you retire. Since up to 85 percent of your Social Security can get taxed, this is an appealing plan for someone likely to pay the high end of taxes.
702j plans also don’t come with required minimum distributions, unlike 401ks and IRAs. Conventional retirement plans require that you take minimum distributions once you reach age 70½, even if you don’t need them. These distributions are taxed just like any income, which can bump your overall tax expenses up.
702j retirement plans can be a valuable part of a tax diversification strategy for some people. However, you should also know about the costs associated with these plans.
Costs of a 702j Retirement Plan
A 702j retirement plan comes with significant fees attached. For the most part, these plans are designed to make money for insurance companies and salespeople, not to help you save.
You’ll have to pay mortality charges, administrative fees, and surrender charges. You’ll also typically spend a significant commission fee to the insurance agent when you start one of these policies. The insurance companies tend to present the costs confusingly, so it’s hard to know what you’ll be paying in total.
These significant fees and costs can add up over time, putting a major dent in your total retirement savings.
When you buy a 702j policy, it’s kind of like purchasing a fancy car. Although it does have value, you’ll need to be prepared to pay the more expensive fees associated with it, just like paying for maintenance and insurance on a Ferrari.
It isn’t something you can buy and forget about. You need to actively take care of it to make it work for you. Many people may regret their 702j purchases, but if you plan, you don’t have to.
Deciding On a 702j Retirement Plan
When deciding on a 702j retirement plan, you should always consult with a fiduciary. Fiduciaries are required to give advice that’s in your best interest, unlike insurance salespeople. Most of the time, they’ll advise you to start by putting money in other types of retirement plans, including 401ks, IRAs, and Roth IRAs.
Conventional retirement plans tend to offer more investment options, lower fees, and much more transparency about what you’re signing up for when you agree to them. You can strategically plan for your tax brackets, Social Security benefits, and everything else that factors into your retirement savings.
Sometimes, a 702j plan can be a useful part of that strategy, but if you decide to go with a 702j plan make sure you’ve compared all your other options first. Look for a low-cost, commission-free 702j plan to save as much money as you can.
Alternatives to a 702j Retirement Plan
What other plans compare to a 702j retirement plan? Let’s examine some of the top options for your retirement needs.
One of the most popular retirement savings vehicles is the 401k plan. If you have an employer that offers a 401k, make sure you’re taking full advantage of this option.
Another choice that works for people without employer-provided retirement plans is an IRA or Roth IRA. Traditional IRAs and Roth IRAs offer different benefits. The one that’s best for you will depend on your unique situation.
Either way, most professionals will advise you to max out both your IRA and 401k retirement savings options before you purchase a 702j life insurance policy. If you’ve fully funded all of your traditional retirement savings options, and you have more disposable income left over that you want to save for retirement, a 702j might be right for you.
Making the Best Decision For Your Future
A 702j retirement plan isn’t right for most people. Unlike IRAs, Roth IRAs, and 401ks, this isn’t the most efficient way to save for retirement. In fact, it’s not a retirement plan at all, and it’s not even the most cost-effective type of life insurance plan.
However, that doesn’t mean a 702j life insurance policy can never be right for you. These plans are best used as supplements to real retirement plans. Since conventional retirement plans place limits on how much you can contribute, you might eventually max them out. That’s when a 702j plan can come in handy, and possibly help you avoid paying more taxes.
Would you try a 702j retirement plan, or are you sticking with more conventional options? Leave a comment and let us know!