Your Full Guide to 702(j) Retirement Plans

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Looking for the perfect retirement plan can be a confusing maze to navigate. Agencies throw options at you left and right, promising fewer taxes paid and more money saved. A fairly popular one you may come across is a 702(j) retirement plan.

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This plan often gets pitched as a secret technique, one that you shouldn’t know about, but they’re going to tell you about anyway. The 702(j) retirement plan is customarily on reserve for billionaires, but today is your lucky day…

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Well, we’re here to get down to the truth of things. We’ve compiled a full guide to answer all your most burning questions on the subject.

What is a 702(j) Retirement Plan?

First and foremost, a 702(j) plan is not a retirement plan at all.

This inherently misleading title is due to claims that it’s the perfect way for you to invest and save your money for retirement. However, that’s not its primary purpose.

A 702(j) plan is actually a permanent life insurance policy.

Like many retirement plans, 702(j) draws its name from the section in the tax code it references. That is section 7702, which has nothing to do with retirement plans at all.

Naming a life insurance policy this way makes it sound like the 401(k) even though they are nothing alike.

How a 702(j) Retirement Plan Works

Like any permanent life insurance policy, when you get a 702(j) account, it is in effect for your entire life. Or as long as you’re paying the premiums.

Increasing the cash value of your account is the entire point of it.

To increase your policy’s cash value, you have to overfund it. You are essentially paying more than what it costs to have the insurance so that the extra money invests toward your retirement.

The more money you pay forward, the more your account will grow, and the more funds you’ll have in the future.

Once you retire, you can borrow against the cash value of your policy as a loan. Any money that you take out of the account is tax-exempt. It’s all for you to use as you see fit.

This serves to provide you with an income in your retirement years.

The Benefits of a 702(j) Retirement Plan

There are a few benefits that come along with permanent life insurance policies that you should know about.

For one, the income you get by taking money out of your 702(j) won’t be subject to income tax, unlike something such as Social Security income. That’s because you paid for it using your post-tax dollars.

It’s basically guaranteed money.

You put that money there, and it’s not going anywhere. That’s the investment part. If other investments or retirement plans fail to work out, you have your 702(j) plan to fall back on.

Once you take a loan out, you don’t have to pay it back.

Any money you use from your 702(j) account is yours to keep until you pass away. After your death, the payout from your life insurance policy can pay the loan back.

And this form of investment is generally much safer than investing in something less predictable like the stock market.

The Downfalls

The main reason permanent life insurance policies as a whole aren’t ideal for most people is because of how much they cost to keep in place.

The premiums on a 702(j) aren’t money you get to keep. These premiums are simply to pay for the coverage so that your loved ones will get money after you die. On top of your premiums, you have to invest extra money to overfund the account.

This overfunding is what creates the cash value that you borrow from in retirement.

That’s the investment part.

Unlike a 401(k) where you get to keep all the money that goes into it, a vast majority of what you’re paying for a 702(j) plan goes toward coverage and other fees. It’s a one step forward, two steps back sort of deal.

And to add the icing on the cake, the money you invest in overfunding and growing your cash value isn’t even really yours.

It’s important to remember that the money you withdraw from your account is a loan. You get the money tax-free while you’re alive, and then you’ll need to pay it back in full (plus interest).

It nullifies whatever payout your family would be getting in the end.

Alternatives

If you don’t happen to be in the 1% of incredibly high wage earners that a 702(j) plan would benefit, you’re much better off investing in a proper retirement plan.

The best alternatives are a 401(k) and an IRA.

401(k) - Allows you to partner with your employer to put money from your paycheck into a retirement account before taxes come out. Sometimes they will match your contributions. When it's time to withdraw the money for retirement, it is subject to taxes.

IRA - You can open an Individual Retirement Account and add pre-tax dollars to it that you can get back in retirement. These funds may be tax-deductible, and when you withdraw them, they will be subject to taxes.

Make sure you weigh the pros and cons of each to get a feel for which plan is right for you.

In Conclusion

There’s a time and a place for the highly touted 702(j) retirement plan. However, if you were looking for a quick and easy investment in your retirement, this isn’t the option for you.

Now you know all you need to know about the not-really-a-retirement plan — but a program that could give you a boost in retirement if you have the funds to keep up with it — 702(j) retirement plan.

Go forth with your knowledge and make informed decisions.


About The Author

Leon Grundstein has more than 28 years of experience in real estate development, with over two decades of experience in the retirement industry. He founded Lynnwood Scriber Gardens with a game-changing business model to promote a healthy and robust retirement lifestyle for older adults.