What's a 7702 Plan?
The main goal of this article is to help the reader understand what a "7702 Plan" is. I personally have tried to research this after I was approached by an acquaintance who sold us this under the guise of a retirement plan. I searched the web, and the only information I found were mostly infomercials. During the sales pitch, I was even told that this is well known to the wealthy who wanted to put aside more money than a 401K would allow.
I never really felt right with this deal since my instinct kept telling me that it seems too good to be true. So when my application was rejected due to some unforeseen issues with auto debiting from my bank, my application was rejected. I thought "how fortunate!" Now I can really do more research about this so called 7702 plan.
7702 Plan Marketing
From my own experience, and from what I've seen on the web, the 7702 Plan is being marketed as an alternative to a 401K. Note that there is a section 401(k)--401K for short--within the IRS code that details qualified cash or deferred arrangements for pensions. But if you actually check out section 7702 of the IRS code, all you will find is a section that defines a life insurance contract!
From my own experience, the sales pitch never mentioned life insurance at the onset. Instead they asked about when I plan on retiring, and how much I would need to be able to live comfortably. Those are two basic and common sense questions that need answers to determine if indeed I can retire in X years and be able to take in so many dollars per month. After they got those figures, they went ahead and came up with a distribution plan for me in order to be able to retire within so many years.
Finally The Only Explanation That Makes Sense
I've just been struggling to wrap my mind around this idea of a retirement plan that is just too good to be true. So I continued to keep searching for a reliable source of explanation. Guess what? I found one at The Motley Fool financial page. The video below succinctly answers the question, in simple terms, "What is a 7702 plan?"
Here are the most obvious differences between what insurance companies call as a 7702 retirement plan and a traditional 401K.
- There really is no such thing as a 7702 plan in the IRS tax code, but there is a section that defines what life insurance is. What they call as a 7702 plan is in its core just a life insurance policy.
- A 401K contribution can be deducted as a tax deduction; basically a tax deferral. In a 7702 plan, the money contributed isn't tax deductible.
- As for growth potential, the insurance company really has no special means of making their growth potential better than any other investments out there, as they are subject to the same growth and limitations as other investment vehicles.
- A 7702 plan is more expensive due to more expenses necessary to maintain and managed the account.
- As with other investment options, capital protection and safety is possible within a 7702 plan. You should review their guarantees.
There really is no such thing as a 7702 plan in the IRS tax code. If someone comes up to you making promises of high returns and guaranteed investment capital and they call this thing a 7702 retirement plan, be cautious.
In general, if it sounds too good to be true, it generally is.
It makes more sound financial move by going the traditional route of contributing to a 401K, and if your employer has a contribution matching, you should contribute as high as you can go. As someone once told me, "it's free money!" (i.e. the employer match is practically free money; why not just take it?).
If you need life insurance, as The Motley Fool suggested, a term life insurance policy should do the job and will be more cost effective.
- 26 USC 7702 Life Insurance Contract Defined - Cornell University Law School
- 7702 Retirement Plan? There's no such thing - Wellfront Knowledge Center
- 26 USC 401 Qualified Pension, Profit-sharing, and Stock Bonus Plans - Cornell University Law School
- What is a 7702 Retirement Plan? - The Motley Fool
More by this Author
Discusses some factors leading to kids becoming more disrespectful over the years. The recent bullying by 7th graders against the bus monitor really highlights the fact that many kids are disrespectful to elders.
About to retire but have limited income? This article explains how you can do it on $1500 per month fixed income.
When you finish reading this article, you will know exactly how to make a 3-figure income part time. Sounds to good to be true? It is true. Remember, I'm only referring to a 3-figure income--meaning an annual income...
No comments yet.