What is the 702(j) retirement plan? Planning for retirement is an important step in everyone’s working life, but with so many options available, it is hard to know where to start. There are individual plans, employer-sponsored plans, and annuities just to name a few. While the most important aspect of retirement savings is actually setting money aside, some products are better suited for each individual investor than others.
Most people will find that investing in employer-sponsored plans and individual plans will meet their needs, some people might need a more tax-advantaged approach to retirement savings and there are products out there like the 702(j) Retirement Plan to help them hit those goals.
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What Is the 702(j) Retirement Plan?
The 702(j) Retirement Plan is actually not a retirement plan at all. Despite the fact the words “Retirement Plan” are used to describe the 702(j), it is in a category all its own and cannot be lumped together with actual retirement plans like 401(k)s, 403(b)s, or Individual Retirement Accounts (IRA)s. The 702(j) plan is actually just a gimmicky, possibly misleading name for a permanent life insurance policy. The 702(j) plan is named for Section 7702 of the US Internal Revenue Service Code that specifies the handling of life insurance policies.
702(j) Plan Specifics:
Unlike 401(k)s, 403(b)s, and IRAs, 702(j) Retirement Plans cannot be bought at a brokerage firm or through your employer. 702(j) Retirement Plans can be purchased through financial advisors and insurance agents as there are special licensing requirements.
As with any insurance policy, the 702(j) is a contract between the issuer and the policyholder, and policyholders are expected to pay premiums. The 702(j) provides a guaranteed death benefit and also has an account that accumulates cash value. While 702(j) plans do accrue interest, they have a range of guaranteed interest (always higher than zero) and that makes them more predictable than an investment that is subject to market ebb and flow. That’s not all good news though because the guaranteed rate range also means that the cash account will always be capped for growth unlike money invested in the market. The guaranteed interest rates in the cash account of a 702(j) will protect the account from going negative, but it also stifles growth when the money invested elsewhere may see exponential growth. There is a risk and reward balance and investors should decide whether capped returns or the promise of no loss is more important to them.
How Do 702(j) Retirement Plans Save For Retirement?
When policyholders pay life insurance premiums on their 702(j) plan, the premiums are divided between paying toward the cash value in the policy and toward the defined death benefit. Essentially, policyholders are overpaying for the cost of the coverage that they need- like that which they would get with a term policy- and the overages go into a cash account that is invested on their behalf. The policyholders do not participate in the market returns, but rather are guaranteed those interest rates within the range.
The insurance company banks on being able to make more money than they promised and that’s just one way they make their money. Policyholders can borrow against their cash value at any time. True retirement accounts that are under IRS jurisdiction cannot withdraw money before the age of 59 ½, so 702(j) Retirement Plans could be very attractive to people hoping to provide for themselves in retirement before the IRS says that they can.
Another reason why the 702(j) account is marketed as an attractive retirement vehicle is because of how the policies allow policyholders to take out a loan against their cash value. The keyword is “loan.” These loans are typically assessed at a relatively low-interest rate and because they are considered “loans” the income provided to the policyholder is not taxed. In fact, the loans do not ever actually have to be repaid and the loan can just be deducted from the death benefit at the policyholder’s passing.
Lastly, because the 702(j) is technically an insurance policy, all monies that are paid to the policy beneficiaries are tax-exempt unlike payouts from IRAs in the event of the IRA owner’s death. IRA beneficiaries are permitted to rollover the deceased’s IRA into their own IRA, but any withdrawals are taxed. 702(j) Retirement Plans do provide a lump sum payment and typical retirement plans do not.
Who Might Benefit from a 702(j)?
702(j) Retirement Plans are probably not a good choice as the only retirement savings vehicle for most people. However, there are a number of people that a 702(j) could work for as part of an overall portfolio. Investors who are currently meeting max contribution limits in their other vehicles and who want to put more money away for retirement savings are good candidates for the 702(j).
Any true retirement account like those from a brokerage firm or an employer is subject to IRS constraints. There are contribution limits, withdrawal regulations, and required minimum distributions. Some people may find that in order to save the amount they need to replace 70-90% of working income, they need more than just an employer retirement fund and an individual retirement fund. For these investors, a 702(j) might be a solid option to save more money for the future.
Other Retirement Savings Options:
One of the major appeals of the 702(j) account is that the guaranteed interest rate range makes the cash account portfolio performance rather predictable. While the 702(j) is not exactly an investment, there are other retirement savings options out there that also don’t take investors on a wild ride and precious metal IRAs are one of the best.
Precious metals IRAs allow investors to hold metals like gold and silver in an investment account as a method for hedging against market fluctuations and the dissolution of the dollar- without having to figure out how to store physical bars.
Precious metal IRAs are a special kind of retirement account called “self-directed.” These self-directed individual retirement accounts or IRAs allow investors to chose a wider variety of products inside their IRA than the typical IRA. Self-directed IRAs can be purchased through typical avenues such as brokerage firms, but besides the investment advisor, self-directed IRAs require custodians for the precious metals. Some brokerage firms will likely recommend a custodian, but the owners of the self-directed IRA are responsible for vetting their custodian. Reputable custodians will likely have an established relationship with up to hundreds of brokerage firms, so finding one you can count on is not an impossible task.
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Types of Gold and Silver IRAs:
Precious metal IRAs are available in both Traditional and Roth- both options are tax-advantaged. Traditional IRAs are taxed when you would like to take out your money at retirement and money invested into the IRA reduces taxable income. Roth IRAs invest money that is already taxed and money that is removed to fund retirement is tax-free. Which type of IRA you chose depends on when you think the tax advantages are best suited for your particular circumstance. Traditional IRAs are better for people currently high-earning and expecting to be in a lower tax bracket at retirement and Roth is better for those who would prefer to pay taxes now and know that what you see is what you get with regards to your retirement account in the future.
Why Gold and Silver IRAs:
Precious metals in a portfolio are considered excellent diversification because they are the ultimate protection against inflation. Long before Governments started printing paper money, precious metals were the only stores of value. Even today, precious metals tend to be a stable investment as compared to investing in the stock market. Additionally, Governments desperate to keep economies afloat, are printing more and more money with no real backing. Gold and silver IRAs are ways to hold stores of actual value and save for retirement at the same time.
Diversification is the key to success in any portfolio. While no investment is without risk, gold and silver IRAs are a reasonably safe way to establish diversification while also protecting against inflation.
As long as investors go into retirement savings with a full understanding of the risks and rewards of any retirement vehicle, there can be a place in their portfolio for many different assets.
Even though the 702(j) is not an actual retirement plan there are definitely ways that a 702(j) can be successfully incorporated into an overall retirement savings strategy to help investors meet their goals after they have fully funded their IRAs and employer-sponsored plans.
Investors looking for stability in their retirement savings that do not wish to purchase an insurance policy like a 702(j) would be wise to look into a Gold or Silver IRA as part of their investment strategy.
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I hope you found this short post about the 702(j) to be helpful and that you now have a better understanding on what it is and what it is all about. Please share your own experience in the comment section below as it can help others. Also, if you got any questions about this I would be more than happy to answer them below!
I wish you success!
founder of Gold Retired