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702(j) Retirement Plans: Everything You Should Know

702(j) Retirement Plans: Everything You Should Know

It doesn’t matter whether you’re in your 20s, 30s, 40s, or 50s — we all know that we have something to look forward to one day: retirement.

But will you have enough money in the bank to retire when you hope to?

You’re never too young (or too old) to start planning for retirement. The sooner you start, the more money you’ll have saved when you finally reach that pinnacle of life.

From 401ks to IRAs to 403bs, there are a variety of retirement plans out there. Do you know which one is right for you?

Today we’re talking about one specific type of retirement plan: the 702(j). What is it? How does it work? Should you have one?

We’ll answer all those questions and more in our full guide to 702(j) retirement plans.

What is a 702(j) Retirement Plan?

The 702(j) retirement plan is nothing like a 401k or an IRA. In fact, it’s not really a retirement plan at all.

It’s a permanent life insurance policy.

Some people use it as a way to ensure that they’ll have access to cash in retirement and more money to leave their beneficiaries when they pass.

How Does a 702(j) Work?

A 702(j) is just like any other insurance policy in the sense that you pay a monthly premium for a certain amount of coverage. The more coverage you want, the higher your monthly premium will be.

So why do some people view this as a retirement plan?

Because if you pay more than your monthly premium requires, that extra amount will increase the cash value of your policy. You can then take that money out in the form of a loan or apply it towards future monthly premiums.

This isn’t without consequence, however. Like all loans, any money you withdraw from a 702(j) will have to be repaid.

Who Can Benefit From a 702(j)?

The 702(j) is far from a traditional retirement plan. But it can still benefit you, especially if you’ve already maxed out your 401k and IRA contributions.

It’s not wise to contribute to a 702(j) in place of a 401k or IRA, but it can be good to contribute to one in addition to your traditional retirement accounts.

In the event of your death, your 702(j) will pay out to your spouse, children, or other beneficiaries. Life insurance policies are never meant to benefit the policyholder. Your beneficiaries only receive the payout when you pass away.

You won’t be able to reap the full benefits of the policy, but your beneficiaries will.

Pros of the 702(j) Plan

There are several benefits to having a 702(j) plan:

Tax-Deferred Contributions

The cash value of your policy will grow tax-deferred, which means you won’t have to pay taxes on the money you put into the account.

Tax-Free Death Benefit for Your Beneficiaries

In most cases, death benefits are not considered taxable income. Most life insurance policies stipulate that if your beneficiary is an individual, they won’t have to pay taxes on the payout. If your policy pays out to your estate, it can be taxable.  

Tax-Free Loans

A 702(j) offers the option to take withdrawals against the cash value of your policy. However, those withdrawals will have to be in the form of a loan, which you’ll need to pay back into the value of the policy.

Here’s why this is a benefit:

Withdrawals on a 702(j) are not considered taxable income. So no matter how much you take out in loan form, it won’t increase your tax liability at the end of the year. 

This can be a big help if you need more cash flow but don’t want to push yourself up into the next tax bracket.

No Risk

702(j) plans are not affected by stock market losses or gains. Unlike 401ks, there is no risk that you will lose any of the cash value of your policy in an economic downturn.

Cons of the 702(j) Plan

Think a 702(j) plan might be a good investment vehicle for you? Here are the drawbacks that you need to be aware of:

You Can Earn More With an IRA

While you won’t lose money through a 702(j), you can gain money with an IRA or a 401k. Unless you’ve maxed out your 401k and IRA contributions for the year, traditional retirement plans are a way to grow your savings.

Fewer Tax Breaks

You get tax breaks for making contributions to 401ks, IRAs, and other retirement plans. You will not get those benefits with a 702(j).

You Could Face Tax Penalties

If your intention is to use your 702(j) as a safety net to access cash, you need to be prepared to pay that loan back. Failure to repay the loan could result in tax liabilities at the end of the year

Complex and Confusing Policies

Many people find that 702(j) policies are complex, confusing, and difficult to understand. Don’t make the mistake of enrolling in one without professional input.

If you’re considering investing in a 702(j), speak with a financial planner or tax consultant to determine if it’s the right investment vehicle for you.

Excessive Fees

Most 702(j) plans are subject to a variety of different fees. There are administrative fees, commission fees paid to the insurance agents, and mortality charges.

If you don’t understand the fee structure for your policy, this can easily eat away at your retirement savings.

Conclusion

The 702(j) is a life insurance policy, not a retirement plan. Like all insurance policies, they’re designed to benefit the insurance company more than the policyholder.

Before you enroll in a 702(j) plan (or any other plan for that matter), talk to a professional. The best way to save for retirement and protect yourself in your golden years is to have a trusted financial expert by your side. 

Author Bio:

Marvelle at South Center sits in the heart of downtown Tukwila. Its urban location offers residents convenient access to nearby restaurants, shopping malls, and medical facilities.

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