IRS Change to 7702 is a Game Changer for Tax-Free Retirement

The million-dollar question for many people is what’s the “best” tool to help them create maximum cash flow in retirement?

-Is it a tax-deferred IRA or 401(k)?
-Is it a Roth IRA/401(k)?
-Is it a tax-deferred annuity?

Of the above three, the best tool is likely a Roth IRA/401(k). Why? Because you are paying taxes now on your contribution, but ALL OF THE GROWTH is allowed to grow tax-free and come out tax-free (although you have to wait until age 59.5 to take the money out).

The problem with Roth IRAs is that you can’t put much money into them and while you can put more than $15,000 into a Roth 401(k), not all employers offer them.

What if I told you that because of 26 U.S. Code § 7702 of the tax code, there is a better option for many people than all of the above three tools (better if you are under age 60).

 What option is thatCash Value Life (CVL) insurance

What is 26 U.S. Code § 7702?—it’s the part of the tax code that deals with CVL insurance. 7702 says that when designed and used properly, money in a CVL policy can grow tax-free and be removed tax-free.

Why is the 7702 code section change (made in 2021) a game-changer?

In layman’s terms, the code change dropped the expenses in CVL policies by approximately 50% as it pertains to growing wealth for retirement.

CVL is a counterintuitive retirement tool—for most, the use of CVL insurance as a retirement tool makes no sense. How can CVL insurance be better than an IRA/401(k) or a Roth version of both?

It’s all about the expenses! A “properly designed” CVL policy can have LESS expenses than growing money in an IRA or 401(k) plan.

Don’t believe me? Let’s look at an example:

45-year-old male, who can allocate $14,625 a year to CVL insurance (indexed universal life) from ages 45-65 and then taking tax-free cash flow from the policy from 66-90. Let’s assume he is currently in the 25% income tax bracket now and in retirement.  Assume the comparable policy is $19,500 a year into a 401(k) plan “tax-deferred” using a 1.2% average mutual fund expense. I’ll assume a 6% conservative gross rate of return over time for both the CVL policy and the 401(k).

Comparing after-tax cash flow in retirement from ages 66-90

-Annual after-tax cash flow from 401(k)       $32,439
-Tax-free cash from the CVL policy              $55,547

-Annual difference                                        $23,108
-Total difference from ages 66-90                $577,700

What about expenses?

-From 45-90 the total expenses in the CVL life policy are projected to be $148,740.
-The mutual fund expenses alone in the 401(k) plan are projected to be $185,982.

And I’ve NOT included a wrap fee which is typically charged in 401(k) plans.

The numbers look interesting, don’t they?

The point of this newsletter isn’t to tell readers that IRAs/401(k)s are bad or evil and that CVL is the answer to all of your retirement questions.

The point is to make you aware that CVL is a viable asset class that you might want to consider using as part of your retirement plan.

Want more information on using CVL as a tax-free retirement vehicle?

Send me an email or give me a call and I’d be happy to get you that information.

Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.