It is common to come across individuals who struggle to tell the difference between a 401(k), a 7702 plan, and an IRA. And they are not to blame since they all depict a few similarities. But most people looking to make their life after retirement enjoyable don’t really understand what these three entail in the first place.
Of course, there is nothing wrong with opening a cash-value life insurance policy. However, there is a significant chance that the policy won’t perform in the same way as a 401(k) or an IRA, so it isn’t a substitute.
A 401(k) plan, named for the tax code that allows employees to avoid taxes when they deposit a portion of their income into a specific retirement account, has been with us for many years now. No wonder it continues enjoying popularity among individuals searching for the ideal retirement plan to leverage.
With the IRA, there are two different types to choose from i.e., traditional IRAs and Roth IRAs. A traditional IRA allows you to save money in your retirement account and count on the deposits as tax deductions. For the Roth IRA, you pay your taxes upfront, but withdrawals after you retire are tax-free.
Bear in mind that any money you invest in your retirement plans is tax-deductible. However, the limits tend to change from year to year. Things are somewhat different with life insurance premiums since they are regarded as personal expenses and are not tax-deductible.
If you choose to withdraw cash from your retirement account before attaining retirement age, you will likely pay a penalty. While there are some exceptions, but for the most part, if you pull out money early, you will be taxed.
It gets pretty complicated when it comes to a cash-value life insurance policy. You can withdraw cash up to your basis, which is the cash amount of your paid premiums, but not including withdrawals you have already taken. In short, you pay a penalty when leveraging a 7702 plan, but you can withdraw cash up to your basis.
