When it comes to saving for retirement, most people know about 401(K)s and IRAs. After all, these are the most common retirement savings plans. However, not many people know that there is a third option: the 7702 retirement plan.
The VestCred 7702 retirement plan is ideal for many people because you can avoid losses when the stock market falls, there’s no annual cap on your contribution that limits what you can save, and people use it as a college savings plan!
In short, a 7702 will give you the peace of mind that an IRA or 401(K) simply cannot.
At Vestcred, we want you to have the knowledge you need to make the best decisions about your retirement future. So, we’d like to debunk several common misconceptions about 7702 life insurance retirement plans:
MYTH #1
“There’s no such thing as a 7702 Retirement Plan. That term is made up.”
THE TRUTH
A 7702 Retirement Plan is a life insurance policy used to generate income in retirement.
For people who qualify, a 7702 life insurance retirement plan may put as much as 50% more after-tax income in their pocket in retirement compared to a traditional retirement plan like a 401(k).
MYTH #2
“Buy life insurance for a death benefit. Invest in a 401(k) for retirement.”
THE TRUTH
Life insurance does provide a death benefit. And 401(k) plans are used to save for retirement. But this oversimplifies the matter. There’s much more to it.
Subsection 7702 of the U.S. tax code grants life insurance most of the same tax advantages granted to IRAs, 401(k)s, and similar retirement plans, plus additional benefits that can make retirement more prosperous and secure.
MYTH #3
“When choosing how to invest for your retirement, the most important thing to focus on is how much you accumulate.”
THE TRUTH
There is a multi-billion-dollar industry called Money Management that relies on you believing this misconception. The more your account grows, the more these companies make. The more you accumulate, the more they benefit!
That’s their business model, which explains why they so heavily promote the message that maximizing accumulation should be everyone’s goal. VestCred focuses on how much you keep rather than how much you accumulate. After all, it’s what you keep that really counts because this is what you live on. VestCred focuses on retirement income net of fees and, most importantly, net of taxes.
We compare the net after-tax income generated by conventional retirement plans with the net after-tax income generated by a VestCred 7702 Retirement Plan. And we tell you which plan projects the most after-tax retirement income and best meets your specific needs.
MYTH #4
“A 401(k) is safer than a 7702.”
THE TRUTH
There are vast regulatory and statutory regimes in place governing all three. Legal filings for IRAs, 401(k)s, and life insurance contracts create safeguards for consumers. In fact, all three are strikingly similar in a number of ways.
You own your 7702 insurance contract and the insurance company holds the cash value, just like you own your IRA and 401(k), and an institutional custodian holds the deposit. You name the beneficiary of your IRA, 401(k), and life insurance. 7702 retirement plans are not government-insured, but neither are 401(k)s. Nor IRAs unless you invest in a government-insured bank account, and the vast majority of IRAs are not.
On balance, these different types of accounts and contracts have a comparable degree of safety in the areas mentioned above.
MYTH #5
“A 7702 retirement plan should be avoided because Whole Life insurance has a low rate of return that’s inappropriate when investing for growth.”
THE TRUTH
7702 retirement plans often use Variable Universal Life (VUL). These policies invest in the same mutual funds used in IRAs and 401(k)s with virtually identical market performance.
Index Universal Life (IUL), the type of life insurance most often used in 7702 retirement plans, uses market indexes to generate returns based on stock market performance. VestCred prefers Index Universal Life (IUL) to protect retirement income. IRAs and 401(k)s experience the full ups-and-downs of the stock market. So do VUL policies. By contrast, IUL policies may give up some market upside above a specified range but eliminate all market downside (negative returns), even during a recession. Index Universal Life offers people peace of mind because their retirement savings will not decline with the market when the stock market falls. Avoiding stock market declines is crucial in retirement when there is no time to recover from a significant loss (a topic explored at length in another article).
By eliminating stock market losses, IUL policies like VestCred’s 7702 Retirement Plan may not need to capture all of the market’s upside to provide more after-tax retirement income than IRAs, 401(k)s, and VUL policies that fall with the stock market.
At VestCred, we’re focused on maximizing our client’s after-tax retirement income.
