Tax Loophole 7702
Saving isn’t always easy especially when it comes to thinking about your loved ones after you are gone. It’s a lot to have to confront. First, there's retirement to think about and eventually, we all leave this earth.
Fortunately, it's not all bad. There's a neat little loophole that not everyone knows about, and it could save you some tax dollars. Variable life insurance tax benefits can reduce the tax that you have to pay on your 401(k) distributions once you retire. This IRS loophole is section 7702 of the tax code and it allows you to put any money you have left after taxes into a policy. When you shuffle off this mortal coil there is a death benefit to a beneficiary. This policy is also invested in stocks or bonds and while it grows your taxes are deferred. It’s different from a regular investment account in that you can switch in and out of investment subaccounts tax-free.
It could be a good fit for the right investor. It was originally created as a way to tie the long-term investments of premium payments to a market interest rate. Make sure you get professional advice that you trust before you do anything rash.
“Get professional advice, and don’t take unnecessary risks with your money,” advises Martin Walcoe, president of David Lerner Associates. “Look for the sensible middle ground of investing. It’s better to start planning sooner rather than later.”
Once the cost of insurance has been totally covered and paid for, it becomes possible to drop the amount of your monthly premium. You pay less every month but your investments continue growing.
Before Section 7702 was created, tax considerations on the cash value of a life insurance policy were negligible. You could stash as much money as you wanted to in a life insurance contract. The death benefit was paid out to beneficiaries with no taxes incurred at all. The bonus was you also got to avoid any taxes on any of the growth of the policy.
No matter what you decide to do when it comes to saving for the future, whether it be for retirement, or for financial security for you, or the ones you leave behind, you’ll need to think about the best way to do it.
The pandemic has unfortunately made thinking about things like death benefits all too real. Having a death benefit tax advantage built into your portfolio may be a perfect solution in the long run.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.