A tax-free retirement account or Section 7702 plan is funded through a permanent cash value life 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 TFRAs 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 an IRA.
Additionally, a TFRA 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 seven to 10 years before withdrawing 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.
