Two sides of the same coin. If you create an infinite bank (infinite banking), you are also creating a tax-free retirement account. If you are creating a tax-free retirement account, you are also creating an infinite bank.
Infinite Bank (Infinite Banking) – Infinite banking is the series of activities or processes through which an individual can take up the role of a banker. It was conceptualized and documented in the book “Becoming Your Own Banker,” authored by Nelson Nash. The infinite banking concept allows individuals to act as their own bank through an overfunded permanent life insurance policy that pays dividends and/or high-yield returns as a leveraging instrument. Like a bank, it allows you to perform two money-earning activities at the same time with the same money. You borrow money from your overfunded policy at a low rate while continuing to earn compounding interest at a higher rate on the same money you borrowed. Although you can use the borrowed money for anything, the ideal is to use it for income-earning ventures while paying it back on your own terms.
Tax-Free Retirement Account – Tax-free retirement accounts are a type of investment plan covered under Section 7702 of the Internal Revenue Code that is designed to provide tax-free income for retirement. As such, you might hear a TFRA retirement account described as a Section 7702 plan.
We at the Life Insurance Safe Zone can market these plans to investors who are looking for an alternative way to save for retirement, beyond a 401(k), pension, or individual retirement account (IRA). But it’s important to understand that technically, they’re not retirement accounts at all. Instead, these are qualified life insurance contracts that can be used to generate tax-free income for retirement. These are alternative methods of retirement planning, which include high yield with no risk.
How Does a TFRA Retirement Account Work?
A tax-free retirement account or Section 7702 plan is funded through an overfunded permanent cash value life insurance policy. Depending on how a TFRA is structured, this may be a whole life policy, variable life policy, or universal life (IUL) insurance policy.
A TFRA is funded with after-tax dollars, similar to the way you’d fund a Roth IRA. Cash value in the policy grows tax-deferred and policy owners can take out tax-free loans from that cash value during their lifetime. The amount of cash value that accrues inside the policy can depend on the underlying investment strategy.
Since TFRA retirement accounts are not qualified plans, they’re not subject to the same tax rules as those plans. Instead, this is a retirement account where investments are tax-exempt. For example, there’s no 10% early withdrawal penalty to worry about if you need to take funds out of the policy prior to age 59 ½ as there would be with a 401(k) or IRA. Income generated by the policy is also tax-free.
TFRA Requirements
TFRAs can be used to plan for retirement alongside other qualified retirement plans but they can’t be commingled. For example, if you’re changing jobs and want to roll over your 401(k), you wouldn’t be able to do a direct rollover to the policy. You could, however, roll the funds over into your new employer’s 401(k) or into a qualified high-yield annuity IRA, which the Life Insurance Safe Zone can help you set up.
Additionally, a TFRA account is a long-term investment plan. It is required that you’re able to fund the account for at least three years, at a minimum. You also must let the income grow for at least one year, ideally seven to ten years, before withdrawing (borrowing) funds from the account.
All rules for TFRA plans are governed by a contract, which is different from some plans like 401(k)s or 403(b) plans, which rules are governed by Congress.
Advantages of a TFRA Retirement Account
Income from Section 7702 plans is tax-free and the principal is not taxable either. With a 401(k), on the other hand, you’d eventually have to pay taxes on earnings once you begin making qualified withdrawals in retirement. A TFRA can also offer greater liquidity since you can access cash value as needed without triggering any type of tax penalty.
Tax-free retirement accounts can also be useful for generating an additional stream of income for retirement. The level of returns you see can depend on the underlying investment strategy. Again, policies can utilize participating whole life, variable life, or universal life strategies .each of which has a different risk/reward profile.
Finally, it’s important to remember that this is life insurance. So that means that once you pass away, your policy beneficiaries will be able to collect the death benefit. Your policy may also include a rider allowing you to take accelerated death benefits to pay for end-of-life care. Keep in mind that taking accelerated benefits or a loan from the policy that is not repaid will reduce the death benefit payable to the beneficiaries.
Disadvantages of Tax-Free Retirement Accounts
Tax-free income sounds good, but it’s important to consider what you’re getting for your money. Cash-value life insurance policies tend to be more expensive than term life insurance. That’s because the policy is designed to cover you for life so there’s a much greater chance of the insurance company will have to pay out a death benefit.
In addition to the premiums involved, these policies may come with management fees or administrative fees, including agent commissions. Depending on the type of policy and the amount of coverage, this commission can end up being quite steep. With the Life Insurance Safe Zone, any and all commissions paid will come from the insurance carrier, not from the client.
You won’t escape fees with a 401(k) or IRA as there can still be management fees and other expenses. But with the Life Insurance Safe Zone, you will not be paying commission fees to invest in them. And in terms of performance, you might see higher returns with investments held in a qualified plan. So, it’s helpful to weigh what you might pay against the potential returns and income you could generate.
How to Open a Tax-Free Retirement Account
If you’re interested in using a TFRA as part of your retirement planning strategy, you can talk to us at the Life Insurance Safe Zone. These plans do have certain guidelines they need to follow under Section 7702 so this typically isn’t something you can try to set up on your own. We will tell you in detail how Tax-free Retirement and Infinite Banking are Two Sides of the Same Coin.
At the Life Insurance Safe Zone, we can review your overall financial situation to determine:
- What your tax liability in retirement might be, based on the income your current retirement accounts are set to generate
- How much income could be created using a tax-free retirement account
- What tax benefits you’d realize from utilizing a TFRA
- Two Sides of the Same Coin.
You can also discuss how much life insurance you might need and whether paying more for a permanent policy versus term life coverage makes sense.
Bottom Line on TFRA
Retirement Planning Tips
- Consider talking to a representative at The Life Insurance Safe Zone in more detail about tax-free retirement accounts and whether one might be right for you.
- When contributing to tax-advantaged plans, be aware of annual contribution limits. With a TFRA retirement account, no such maximum exists. But the IRS does cap how much you can save in a 401(k) or IRA each year. Being mindful of the annual limits for contributions to each type of plan can help you develop a strategy for maxing out your retirement accounts.
- Just keep in mind that it is Two Sides of the Same Coin.
Benefits Derived from Infinite Banking
- You have the potential of earning interest on the money you are otherwise going to spend.
- You have a permanent death benefit that once paid for is owned by you or your estate.
- Increasing Death Benefit. As your cash value increases, so does your Death Benefit. The effective death benefit will always be net of any outstanding loans.
- You can earn 5-12+% on money otherwise sitting in the bank earning 0.0-0.75% interest.
- You have the ability to become independent of banks.
- Unlike a bank loan, you set the terms of the repayment of the loan.
- If you are a business owner, you have the advantage of having the money in the policy earn interest while using a loan to invest in your business and earn money on the same dollar.
- Protection against market crashes.
- Having your money shielded from gain-based taxes, creditor demands, lawsuits, judgments, and liens
- Built-in tax-free retirement.
Summary
This policy provides the best of all worlds:
- Tax-Free Retirement
- Infinite Banking
- No-hassle low interest borrowing without qualifying
- You decide on the repayment terms, not the bank.
- Having your money shielded from gain-based taxes, creditor demands, lawsuits, judgments, and liens
- Financial protection against premature death and catastrophic illness.
- Two Sides of the Same Coin.
Contact me by using any of the following methods:
- Complete the form for General Life Insurance
- Complete the form for Business Plans
- Complete the form for Tax-Free Retirement Income
- Call or text me at 805-300-1769
- Email: [email protected]
- Get on my calendar: