I've been seeing a lot of questions lately about a so-called retirement plan variously referred to as "702(j)" or "702" or "7702." The Palm Beach Research Group breathlessly promotes it as President Reagan's secret retirement plan...something only the 1% are using. But wait, now you can get in on it too! Whoa! If President Reagan used it, it must be good, right?!
The reality is a so-called "702(j)" plan is technically not even a retirement plan per se.
Section 7702 is simply a reference to a part of the tax code that pertains to life insurance. "702(j) plans" are basically a marketing gimmick to sell you permanent life insurance to fund your retirement. By name-dropping President Reagan (and others) and calling it a "702(j)" they're just positioning it with an aura of respectability like a 401(k), which actually is a real retirement plan.
Now, I'm not anti permanent life insurance. But as a retirement vehicle, it fits only a small percentage of the American population. I recently responded to a question from an 80 year old who was interested in transferring their IRA to a "702(j)." Thankfully, I was able to tell them they can't. Needless to say, this strategy will get sold to folks who are going to get financially hurt over it.
If you can say "yes" to each of these points, you may be a candidate to add permanent life insurance to your retirement funding lineup:
- You've already maximized contributions (to the extent you're eligible) to other real retirement plans such as 401(k), 403(b), IRA, or Roth IRA.
- You have excess cash flow and are still looking for tax-smart opportunities to squirrel away that money toward retirement.
- Your excess cash flow is high enough that you can significantly over-fund the life insurance policy (paying a minimal premium is not going to accrue sufficient values for this strategy).
- You anticipate that you'll have this level of excess cash flow for many years, enabling you to over-fund the policy over many years.
- The policy is structured to emphasize growth of cash values.
- In retirement, you'll be careful how you access the cash values so that you don't inadvertently lapse the insurance policy or end up having to pay premiums once again.
If that describes you and what you're seeking, it'd be worth your while to investigate the strategy. Work with a reputable financial planner...preferably a fee-only planner who is versed in insurance matters. Oh, and don't get caught up in the "702(j)" aura. Let's just call it what it is...permanent life insurance.