It is common for insurance agents to market the 7702 plan as a retirement plan. But this is far from the truth, and they’re only doing so to win your business. After all, a 7702 planis more of a life insurance policy with higher premiums than term insurance policies.
Before leveraging 7702 plans, you must understand what is destined to come your way. Luckily, that is precisely what this blog post will help you unravel today. Below are some of the most important things to keep in mind before taking out a 7702 plan.
Tax Deductions
It is obvious that money invested in your retirement plan is tax deductible even though the limits tend to change from year to year. So do not be surprised if you fail to enjoy tax benefits after opting for IRA and 401(k) plans. Things tend to be different when it comes to life insurance premiums since they’re viewed at as personal expenses and are not tax deductible.
Penalties
When having a retirement account, you’ll have to make do with a penalty if for any reason you decide to withdraw the savings before retiring from your workplace.
While there are some exceptions, but in most cases, if you withdraw your money early, you’re going to be taxed. With cash value life insurance, it is somehow complicated since you can pull out money early until your basis.
What this simply means is that you can withdraw cash up to the amount of premiums you’ve paid in. Remember, this also includes any other withdrawable you may have taken initially. In short, 7702 plans are entitled to penalties if you withdraw cash from your account earlier on.
All in all, how well a 7702 plan performs compared to other retirement plans depends on the investments made with the fund you contribute to the plan. Regardless of the plan you choose, it is always a good idea to have a firm understanding of the investments your money is tied up in to stand the chance of reaping maximum benefits.
