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TFRA – Tax-Free Retirement Account

Reviewed By: Rob Pinner

Rob Pinner Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

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Checked By: Holly Mitchell

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Retirement accounts come in many different shapes and sizes, each with its own unique benefits. One type of account that has gained popularity in recent years is the tax-free retirement account or TFRA.

TFRAs are cash-value life insurance plans that are designed to help eliminate taxes on your retirement income and are a great strategy for long-term financial planning. In this post, we’ll take you through everything you need to know about TFRAs, from how they differ from traditional 401(k)s and Roth IRAs to any current tax advantages or disadvantages.

These types of retirement accounts are not qualified retirement plans or employer-sponsored retirement plans. Instead, they are individually owned long-term strategies. Cash value accumulates in these types of accounts and can be accessed as income without having to pay taxes on it by taking loans from the insurance company.

How does a TFRA Work?

Your tax-free retirement account (Section 7702 plan) will be funded using a properly structured indexed universal life insurance policy.

There are many benefits to funding your TFRA with after-tax dollars, just as you would with a Roth IRA. The cash value in the policy grows tax-deferred, and policy owners can take out tax-free loans using their cash account as collateral during their lifetime. This can be an extremely beneficial way to accumulate wealth while not having to worry about paying taxes on the growth.

TFRAs are not subject to the same governmental constraints as qualified plans like 401(k)s or IRAs. For example, you can use the money from a TFRA account without paying a 10% penalty before age 59 ½ and there is no required minimum distribution at age 72. Your income from your account is tax-free.

Additionally, your tax-free retirement account can be used alongside employer-sponsored retirement plans as long as the funds are not commingled. Moreover, if you were to change employers, you would not be allowed to roll any 401(k) funds into your permanent insurance plan. But, there’s no problem with rolling those funds into your new employer’s 401(k) or an IRA.

What are the Pros and Cons?


A tax-free retirement account funded with cash value life insurance can offer many benefits, including the ability to save money over time without paying taxes on the growth. This can be a great way to minimize your taxes during retirement.

These accounts often have the triple tax advantage of tax-free growth, tax-free income during retirement, and tax-free transfer of wealth upon death.

Some other advantages of these accounts include no stock market risk and the fact that you cannot lose the money invested, as opposed to a Roth IRA or 401k.


When you purchase one of these types of plans, you also get a death benefit. However, you must medically qualify with the life insurance company before you can buy the plan. This may be difficult to do depending on your health history.

Furthermore, people who are in a higher tax bracket do not receive a tax deduction on their annual contribution limit because the premiums are paid with after-tax money.

Use Optional Insurance Riders to Customize Your Tax-Free Retirement Account

While most applicants prefer the lowest death benefit possible in their TFRA plan, there are riders you may want to consider to broaden your coverage and add additional living benefits:

  • Accelerated Death Benefit – Although many permanent life insurance policies contain automatically contain this benefit in the policy, it is well worth an additional premium if you need to add it as a rider.
  • A terminal diagnosis can be devastating news, both emotionally and financially. Accelerated death benefit riders can help ease the financial burden by providing a payout in advance of your death. To be eligible for this benefit, you will generally need a doctor’s diagnosis confirming that you have 6 to 12 months left to live.

While no amount of money can make up for the loss of a loved one, an acceleration death benefit rider can provide some financial relief during a difficult time. The amount paid out in advance is generally deducted from the death benefit that is paid to your beneficiary(s).

  • Long-Term Care Rider – With a long-term care rider on your whole life insurance policy, you can get an advance on your death benefit to help pay for long-term care expenses. This hybrid long-term care insurance coverage is much less expensive than a stand-alone policy, especially when you purchase it as a young adult.
  • Guaranteed Insurability Option – life insurance is one of the most important investments you can make for your family’s future. A Guaranteed Insurability Option (GIO) ensures that you will always be able to increase your coverage on certain birthdays, without having to go through medical underwriting. This provides peace of mind, knowing that your family will always be protected. Depending on the company, you may be able to make this choice up to 9 times, giving you complete control over your coverage.
  • Critical Illness and Chronic Illness Riders – The Critical Illness and Chronic Illness riders provide a lump sum payment in the event that the policyholder is diagnosed with a critical or chronic illness. This benefit is an advance against the policy’s death benefit, meaning that it will be deducted from the death benefit when the policyholder passes away. Some of the illnesses covered by this rider include cancer, stroke, heart attack, kidney failure, and ALS.

Who Should Consider a Tax-Free Retirement Account?

The short answer is everyone. Even if you are already contributing to a qualified retirement plan, you will have considerable tax liability when you begin taking distributions during retirement.

By combining your traditional retirement plans with a TFRA, you can accumulate significant wealth that can be accessed on a tax-free basis. You need life insurance and you need retirement income, right?  Give us a call to discuss adding a tax-free retirement account to your retirement plan.