Imagine enjoying your retirement without worrying about taxes on your income, giving you peace of mind and financial freedom. A Tax-Free Retirement Account (TFRA) can make this possible. Learn how you can secure your future by using the TFRA Account.
Retirement accounts come in many different shapes and sizes, each with its unique benefits. One type of account that has gained popularity recently is the tax-free retirement account or TFRA account.
What is a TFRA?
TFRA accounts are cash-value life insurance plans designed to help eliminate taxes on your retirement income and are a great strategy for long-term financial planning. IUL plans are the most common plans used. In this post, we’ll take you through everything you need to know about TFRA accounts, 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 non-qualified retirement plans or employer-sponsored retirement plans. Instead, they are individually owned cash value life insurance policies designed for long-term financial strategies. Cash value accumulates in these types of accounts and can be accessed as income without paying taxes on it by taking loans from the insurance company.
How does a TFRA Account 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 account 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.
TFRA vs. 401(k)
A 401(k) is an employer-sponsored retirement account. Contributions to a 401(k) are made with pre-tax dollars, which means you will pay taxes when you withdraw the money. In contrast, contributions to a TFRA Accounts are made with after-tax dollars, offering tax-free loans and withdrawals. Additionally, 401(k)s have penalties for early withdrawal before age 59 ½ and required minimum distributions at age 72, whereas TFRA Accounts do not have these restrictions. A TFRA, or IUL policy has advantages that a 401k does not.
TFRA vs. Roth IRAs
Both TFRAs and Roth IRAs offer tax-free growth and withdrawals. However, TFRAs provide more flexibility, as they do not have age restrictions for withdrawals and do not impose income limits on contributions. This makes TFRAs a viable option for those seeking greater flexibility in their retirement planning.
Pros and Cons of a TFRA Account
Advantages
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- No limit to contribution amount. The 401k, Roth IRA and traditional IRAs all have contribution limits.
- Minimize taxes on retirement income
- Tax-free growth
- No stock market risk
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Disadvantages
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- Must be healthy to qualify
- Contributions are not tax-deductible
- If you decrease your premium in later years you plan may not perform as initially illustrated.
- There may be a cap on your earning potential.
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Customize Your TFRA Account with Insurance Riders
While the most efficient plan design is using the lowest death benefit possible in a TFRA account and maximum premium contributed, there are riders you may want to consider to enhance your TFRA:
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- Accelerated Death Benefit: Provides a payout in advance if diagnosed with a terminal illness.
- Long-Term Care Rider: Uses death benefit to cover long-term care expenses.
- Guaranteed Insurability Option: Allows increasing coverage without medical underwriting on specific birthdays.
- Critical Illness and Chronic Illness Riders: Offers a lump sum payment for critical or chronic illnesses, deducted from the death benefit.
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Who Should Consider a TFRA 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?
Ready to add to your current financial strategy with a TFRA account? Contact us today to discuss how you can benefit from tax-free retirement savings. Take the first step towards a worry-free retirement and ensure your wealth grows tax-free.
FAQs About TFRA Accounts
What is a TFRA Account and how does it work?
A TFRA (Tax-Free Retirement Account) is a type of cash-value life insurance plan designed to provide tax-free income during retirement. It is funded with after-tax dollars, similar to a Roth IRA. The account grows tax-deferred, and policyholders can take out tax-free loans against the cash value accumulated in the account. Unlike traditional retirement accounts, TFRA accounts are not subject to the same governmental constraints and penalties, offering more flexibility in accessing funds.
What are the advantages of a TFRA Account compared to other retirement plans?
TFRA Accounts offer several unique advantages:
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- Tax-Free Growth: The cash value in the TFRA account grows without being taxed.
- Tax-Free Withdrawals: Loans taken against the cash value are tax-free.
- No Penalties: There are no penalties for accessing funds before age 59 ½ and no required minimum distributions at age 72.
- No Stock Market Risk: Unlike 401(k)s or IRAs, the money invested in a TFRA account is not subject to stock market fluctuations.
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Are there any disadvantages to opening a TFRA Account?
Yes, while TFRA Accounts offer many benefits, there are some disadvantages to consider:
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- Medical Underwriting: You must medically qualify for the life insurance policy.
- No Tax Deduction: Contributions to a TFRA are made with after-tax dollars, so there are no immediate tax deductions.
- Cost of Insurance Riders: Adding optional riders to customize your coverage can increase the overall cost of the policy.
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Who should consider opening a TFRA Account?
TFRA Accounts can be beneficial for a wide range of individuals, especially those who:
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- Seek Tax-Free Retirement Income: If you want to minimize your tax liability during retirement, a TFRA account can be a valuable addition to your financial strategy.
- Need Flexibility: If you prefer a retirement account that offers flexibility in accessing funds without penalties and restrictions.
- Have Long-Term Financial Goals: If you are looking for a long-term financial planning strategy that includes life insurance benefits and potential tax-free wealth transfer.
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Can I contribute to a TFRA and a 401(k) simultaneously?
Yes, you can contribute to both a TFRA and an employer-sponsored retirement plan like a 401(k). We suggest contributing to your 401(k) and taking the employer matching funds.
