Confidence Financial

The Truth About 7702 Tax Free Retirement

The Truth About 7702 Tax Free Retirement


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Using section 7702 of the Internal Revenue Code is an often misunderstood financial strategy. Many so-called "experts" across the web malign this important tool in order to further their own interests. At Confidence Financial Partners, we're committed to telling the truth about Code section 7702 and how it establishes the rules to follow in order to use this powerful financial tool and better your future.

These financial instruments are disparaged by naysayers for two reasons:

Firstly, these prognosticators sell advice and products to clients looking for a quick fix. They make their money by charging you an annual fee to manage your money. They have to keep your dream of a future higher return alive in order to keep you paying them an annual fee. Section 7702 accounts, also known as maximum funded permanent life insurance contracts, are not a quick fix - it involves an upfront capital investment, and it requires discipline over a period of years before the (considerable) payoff is achieved.

This is not a plan for investors with low net worth or an inability to budget. Thus, if average consumers knew what a 7702 would require of them, they would probably opt for easier and less-rewarding financial instruments put forth by most stock brokers and asset managers.

Secondly, conventional financial wisdom benefits established financial power structures. Investing in IRAs and borrowing from banks keeps the power structures in place. With a 7702 account, you become the banker. You take your own financial power back. The entire American financial system has a vested interest in this not happening, so they advise against it. Convenient, no?

But you're here - meaning you want to control your own financial future and invest wisely. So here's a simple explanation of how a 7702 account can help you prepare for the future, avoid taxation, and leave a lasting legacy.

You establish a 7702 account (a permanent indexed universal life insurance policy) with a respected and long-running mutual life insurance company. You make sure it is designed to have a low death benefit and a high cash value. Then, you funnel a significant amount of your savings into the account over the first four to five years. After this time period, when you need to make large purchases (such as cars or college tuition) you borrow from the mutual insurance company at a reasonable interest rate using the cash value of your 7702 account as collateral. You pay this loan back as you would a bank. You repeat this process until you retire.

All the interest you pay on these loans over your lifetime simply returns to the pool of money that the mutual insurance company holds. You're an owner of this company as a policyholder. Instead of paying interest to a bank that disappears into a banker's pockets, this interest simply adds to your cash value. Most respected mutual insurance companies see an annual return of 4.5%-6.5% on their holdings, and any interest you pay back on your loan simply factors into this rate of return!

The key to this system is that the money you borrow is NOT deducted from your cash value - meaning your cash keeps earning as if you'd never borrowed it. You can even take the money borrowed and invest it somewhere else. The cash value of the insurance contract serves as collateral. Only if you fail to pay back the loan does the cash value eventually begin to decrease. We told you it would require discipline - you have to be an honest banker!

After you retire, you take a yearly income as a tax-free loan against the cash value of your policy - but this time you don't pay it back. The interest being made on the accrued cash value will very likely outpace the interest owed on the retirement "loan," which prevents the interest from eating into your cash value. When you die, the collateralized cash value pays off the retirement income "loans" to settle the debt - without a tax penalty - and the rest is distributed as a tax-free death benefit to your family.

Everything comes with a cost - and the cost of a successful 7702 account involves education, discipline, and upfront capital. If you're unable to commit to a reasonable savings plan, work on establishing income streams first. If, however, you have money ready to invest in your family's future, get in touch with us at Confidence Financial Partners so we can talk about getting started.