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Bouman: President Reagan’s Secret 702(j) Retirement Plan

on November 14, 2017 - 2:51pm
By BEN BOUMAN
Alpine Financial Partners

Several times over the past few weeks I have been asked if I knew anything about “President Reagan’s Retirement Plan” and a 702(j)-retirement plan. I had never heard of such a thing, so I decided to investigate it. Here’s the deal folks. There is no such thing. This concept goes by many names. The 770 account, the 702(j), the 7702, The Presidents Secret Account, Invisible account, etc. It resurfaces every few years with a new name and new marketing approach from salesmen in the insurance business.

A 702(j) is not actually a retirement savings plan at all. It is a permanent life insurance policy that builds cash value and is defined by IRS code Section 7702, which happened to be added while President Reagan was in office. Calling it by its tax code, a 702(j) or a 707, or even a 7702, rather than “cash value life insurance” is a clever way to market it so that consumers think a 702(j) is somehow in the same category as retirement investments such as 401(k)s, 403(b)s, 457s, and IRAs.

Using life insurance to supplement retirement income is not a new thing at all. People have been utilizing this for decades. It’s use however doesn’t make a lot of sense for everyone. Yes, your premium dollars can grow tax-free and that cash value can be accessed tax-free through policy loans. This can add to your tax-free bucket of money when you retire. However, the fees may exceed those of traditional retirement savings options. 

The different types of cash value life insurance will have different fees and different components. Straight Whole Life being the least complex but the most expensive. Variable Universal Life and Indexed Universal Life have cash accounts that will need investment adjustments over the years. Choosing the right insurance company and the right policy requires access and experience. Choose an Investment Advisor that can offer you both.

When considering using cash value life insurance to supplement your retirement plan first look to the tax-deferred options already available to you. Fully fund your 401(k), currently at $18,000 and $23,000 if you are over 50. Fully fund an IRA, currently at $5,500 and $6,500 if you are over 50. Work with your advisor to determine Phase-outs, Traditional vs. Roth, and what order to fund which account. 

If you have fully funded the options available to you and still have disposable income that you want to save for the future, then it may make sense to work with your advisor in the proper construction of a cash value life insurance policy for retirement.

Typically, this would fit best for high wage earners. They may be phased out of opening to a Roth IRA. This would be a way to save tax-deferred dollars for tax-free income. Life insurance contracts don’t count as income in retirement. Therefore, they don’t count towards determining the taxability of your Social Security. It doesn’t count toward the Medicare Part B premium penalty surcharges. And best of all, you don’t have to withdrawal money. There are no required minimum distributions (RMDs) as with IRAs and 401(k)s at age 70.5.

Personally, I am considering purchasing some cash value life insurance for my son who just turned 1 year old. It does not make sense for me to use this strategy for myself or my wife now.  However, I may be able to help with son’s education, a down payment on a home, retirement income, and/or a death benefit for his beneficiaries with an affordable annual premium today. 

These examples are merely guidelines. Each individual's situation is unique and that is why a plan specific to their situation should be crafted. Not all individuals will qualify for life insurance.  If qualified, premium may differ based on age and health.

Ben Bouman operates under the DBA Alpine Financial Partners and is a Registered Investment Advisor with Cetera Advisors, LLC. An independent broker/dealer. Member FINRA/SIPC. www.alpinefinancialpartners.com


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