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Before You Rollover Your 401k Into an IRA, Consider Tax Rule 7702
Conventional wisdom when you leave a job is to find an IRA advisor and rollover your 401k to continue the tax-deferred benefits of an IRS qualified retirement plan, but more and more Americans are taking the time (and considerable effort) to set up a new one. IRS Approved Private Plan Retirement Accounts under Tax Rule 7702. Properly structured there is no other retirement program like the 7702 Private Plan.
7702 Structuring a private plan properly is not for the faint of heart, the first and most important step is to find a qualified and experienced advisor. The 7702 private plan pays about 80% less commissions over 10 years than the average IRA account, so most financial and retirement advisors won’t tell you about this plan because it would mean a big pay cut, and few advisors even have the skills or know how to properly set it up in the first place. .
Comparing the 7702 Private Plan Apples to Other Traditional IRS Qualified Retirement Programs It’s hard for most people to understand exactly what you’re getting from your private plan. The first hurdle is understanding that contributions to a 7702 private plan are taxed like a ROTH IRA, so at first glance it may seem like you’re losing a lot of money by making this type of rollover and paying all the deferred taxes. Unlike traditional IRAs, 401k and other plans, income from a 7702 private plan is tax-free and is not counted as income to calculate Social Security taxes.
Many Americans will pay a much larger tax bill in retirement in terms of actual dollars paid by simply deferring taxes in a traditional qualified plan if they just bite the bullet and pay taxes now. A famous author on the subject of “Last Chance Retirement” asked the question, “Which do you pay taxes on, the seed or the crop?” Another hidden tax trap in most traditional IRS qualified plans is how earnings from these plans increase taxes on Social Security benefits. As a rule, income from traditional retirement plans will count toward your Social Security income tax formula, and tax up to 85% of your Social Security benefits! While you’re only paying more taxes on the total dollar with a traditional tax-deferred retirement account, the income you receive is increasing the taxes you owe on your Social Security income.
With only a few exceptions, 100% of income from a 7702 private plan is tax-free, and unlike income from traditional retirement plans, 7702 private plan income is not considered when determining the taxes you owe on your Social Security benefits. This can account for a significant amount of money over a 20-year retirement period.
Risk is another factor to consider. Recently we’ve seen massive losses in the stock market that have wiped trillions of dollars off the market value and depleted the retirement accounts of millions of Americans, with some losing more than 50%. A well structured, 7702 private plan will earn returns based on widely recognized stock market indices. If the market index (let’s use the S&P 500 as an example) goes up 10% in a year, then your account accrues 10% interest for that year. But if the market loses 10% during that time, your principle balance and any credited interest in the 7702 private plan is protected, with the account only accruing 0% interest for that year (some 7702 plan administrators even give you the option to choose. Each A fixed interest rate announced on the anniversary date of the year plan, this is a useful option if you think that the market is going to perform lower than the announced rate for that year, when the market index starts showing life again you change the crediting methods. To earn market based returns , in a well-structured 7702 private plan you can never lose your principle or credit interest due to market losses) Once again there is no commission on a 7702 private plan compared to most traditional IRS. Qualified plans, so don’t be surprised if your advisor hasn’t told you about these heads you win, tails you lose investment strategy. Click to view this graph for more information on 7702 Private Plans Market Risk Index Strategy is not available.
There are additional ‘living’ benefits that can only be found in the 7702 private plan. State and federal law requires that a 7702 private plan be administered by an insurance company licensed to do business in your state. This is because Congress has mandated that every 7702 private plan include a minimum fund guarantee benefit in order to qualify under IRC 7702. This means that if you die prematurely, your surviving spouse will receive an almost tax-free payment from you. You had lived and contributed continuously to your private plan until retirement. Many private plan administrators are now offering 7702 private plan accounts that include a flexible guaranteed funding benefit where the entire benefit is available during your lifetime if you experience certain medical events in your life.
Moving into retirement A flexible guaranteed funding benefit in some 7702 private plans will allow for access due to long-term care needs. One company offers 2% of the entire Flexible Guarantee Funding benefit if you are diagnosed as unable to perform 2 out of 6 activities of daily living. This benefit in the 7702 private plan is similar to a built in long term care insurance policy at no additional cost. For example, if the Flexible Guaranteed Funding Benefit is $450,000, then 2% per month would equate to a tax-free payment of up to $9,000 for long-term care needs. If you haven’t priced long-term care insurance recently, you’re in for a shock, this stuff is expensive but it’s built into many 7702 private plan retirement accounts that are currently offered at no charge by approved 7702 private plan administrators.
Setting up a well-structured 7702 personal plan is actually quite easy for most people once you find an advisor who knows how to structure it correctly. You must qualify for the Guaranteed Funding Benefit with a physical exam, just like any life insurance application, and there are IRS rules for rolling funds into the account, but once you set up a 7702 private plan it will grow there. Your retirement savings are based on market gains but without market risk and protect your family from other financial risks for your entire life.
No other retirement plan offers the same benefits as the 7702 Private Plan and no other traditional plan offers you market upside without any associated market risk. On May 16, 2008 the S&P 500 closed at 1425.35, Today (1-27-2008) the S&P 500 index closed at 845.71 If your retirement account was in a 7702 private plan, you still have all of your original investments and any will be credited. Interest was earned on the account. Then say the market closes at 930.28 on January 27, 2010, while everyone else is still in serious losses Your 7702 Private Plan account will be credited with 10% interest on the entire original balance plus any previously credited interest.
The downside protection with upside market potential and a host of ‘living’ benefits in a well-structured 7702 private plan is worth the effort of finding an honest advisor who is willing to help you create and manage a 7702 private plan for life.
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