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Everything You Should Know About a Tax-Free Retirement Account

A tax-free retirement account (TFRA) is a long-term investment that attempts to minimize your tax burden in your later years. It isn’t a qualified plan, so it follows different rules than a 401(k) or IRA. Your account will be covered under Section 7702 of the Internal Revenue Code, and you’ll want to work with a professional wealth management firm to ensure your account is set up correctly and structured according to the tax code. 

A TFRA account is actually a form of life insurance you can use to generate tax-free income. The plan ties to a whole, variable, or universal life insurance policy, so there will be a payout for your spouse or heirs from the account when you pass away. The money you put into the policy grows over time, making it an attractive investment vehicle.

Learning as much as possible about these retirement accounts is vital as you plan for your future. This guide will explain everything you should know about TFRA accounts so you can decide whether they’re right for you.

Situations Where a TFRA Account Might Work for You

Many types of retirement accounts are available, and most are worth examining as you begin planning for your later years. A TFRA account can work for you in various scenarios, as it all depends on your goals. Looking into one of these accounts is advisable if you:

Will Be in a Higher Tax Bracket After Retirement

Some individuals do such a great job of planning for the future that they end up paying higher taxes after retirement than they paid while working. A TFRA can minimize your taxes because you won’t pay tax on the gains your investments make when you withdraw them. The result is less of a tax burden after you retire. 

Are Looking for Life Insurance

A tax-free retirement account could be a good investment if you’re already considering a life insurance policy. Structuring your life insurance policy in a manner that allows it to double as a retirement account can enable you to take full advantage of the money you’re making while maximizing your growth potential. 

Want Liquidity

You don’t have to wait for retirement or death for access to the funds in your account. This money is available to you whenever you need it, so you can enjoy tax-free growth and withdraw the cash without penalty as needed. Those who like having liquidity might want to look into TFRAs.

Anyone in one of these scenarios might find a tax-free account beneficial. Researching these policies as much as possible and speaking with an expert makes it more likely you’ll make the right decision for your future.

Four Benefits of a Tax-Free Retirement Account

A TFRA account should benefit you if you structure it correctly. The goal is to have as much tax-free income as possible in future years. Some pros to examine include the following:

1. Growth Isn’t Taxable

You’ll use after-tax dollars to fund your TFRA, so you won’t pay tax on the money you withdraw from it in the future. This tax-free benefit is similar to a Roth IRA and far different from a 401(k), where you’re responsible for paying tax on earnings when you make withdrawals.

2. Access the Money Anytime

You can access the money in your TFRA anytime because it isn’t a qualified retirement fund. You won’t have to pay a penalty if you take this money before retirement age, as it’s yours whenever you need it. IRAs, on the other hand, are subject to a 10% early withdrawal charge.

3. Connected to Life Insurance

Your investment plan is tied to a life insurance policy, which can benefit your family in the future. Storing all the money in the account leaves a nice inheritance for your heirs, with the bonus of having access to the money if you require it.

4. Zero Floor Protection

Tax-free retirement accounts from large financial institutions allow you to participate in the stock market’s growth without restrictions while providing you with a zero floor. “Zero floor” means you won’t lose your initial investment, even if the market is adverse. This feature reduces risk while ensuring you can take advantage of market appreciation.

These benefits could be enough to steer you toward a tax-free retirement account. There are some drawbacks worth learning about before you begin, though, especially if you have little retirement-planning experience. 

The Drawbacks of a Tax-Free Retirement Account

TFRAs sound like the perfect investment, but there are some cons to consider. Having all the information makes it easier to decide on suitable retirement investments for your situation. Some negatives to understand include the following:

Premiums Could Be Significant

Your life insurance provider isn’t offering you a policy for free, and the premiums could be significant. You could have this policy for the rest of your life, and the insurance company will want to earn on its investments, so you should factor these costs in when deciding on a retirement account.

There Are Management Fees

There will be management costs associated with your investments. You can’t avoid these fees unless you self-manage your assets, so you’ll also have to pay extra costs than with other retirement accounts, but they’re worth learning about nonetheless. 

Performance Can Vary

The performance of your investments could vary significantly over time, and you could find yourself earning less than you would with a different investment type. The zero floor policy is excellent because it protects against losses, but it also limits the risk the holder is willing to take. The result could be a reduced overall payout compared to an IRA.

These disadvantages of a tax-free retirement account aren’t necessarily deal-breakers for everyone, but they’re worth considering as you move forward. Having all the information you need in front of you makes your retirement decisions far more manageable. 

Planning for Your Retirement

You can begin retirement planning at any time. Putting money away at a young age gives it time to grow and can create a nest egg in your later years, but you can also add to your portfolio at any time with a tax-free retirement account.

Bogart Wealth is a wealth management firm with offices in Houston, Texas, and Northern Virginia. We can help you plan for retirement by investigating the best investment options to meet your needs and providing the necessary advice. Contact Bogart Wealth to speak with an expert about tax-free retirement accounts.

IMPORTANT DISCLOSURE INFORMATION:

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.comPlease Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

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