Ask a Fool: What Is a 7702 Retirement Plan?

In this video as part of The Motley Fool's "Ask a Fool" series, senior advisor to The Motley Fool's Rule Your Retirement service, Robert Brokamp, takes a question from a Fool reader, who asks: "What are your thoughts on a 7702 retirement plan? We are in negotiations with an agent about a 7702 plan that is alleged to be better than an IRA or 401(k) in terms of safety and growth potential." Robert gives several reasons to be suspicious of this 7702 plan, and reiterates the strengths of a more traditional retirement plan.

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  • Report this Comment On January 24, 2014, at 11:44 PM, bdjphillips wrote:

    I very disappointed at the liberty Mr. Bokamps takes in his assumptions on this topic. Traditional investing and 401k comments benefit from very generous assumptions, while the 7702 structure receives no generosity.

    7702 fees, including COI, are significantly less expensive than median 401k fees over any 30 year period. Since the discussion presumes longterm retirement planning, that would be a more fair overall comparison.

    Whether you get a tax deduction for 401k contributions or simply a deferment may only be a matter of technical semantics but the 'deduction' theory is surely generous. In fact, simply deferring income and taxes to a future date could be the riskiest gamble of all. Given the recent increase in top tax rate by over 13% should be evidence for future rate concerns.

    IUL plans, offered by A rated providers, offer significant upside potential with zero downside risk. VUL plans can provide greater return but with obvious risk.

    7702 plans incorporate protections for the family and essentially avoid probate delays bringing almost immediate relief to surviving family members.

    Finally, in 1978 when Sub-section 401(k) of the IRC was first utilized to defer executive compensation from 70% tax burden to a future, hopefully lower rate, there wasn't a 401(k) plan. It was a 401(k) strategy, legal under the tax code, that grew to become a 401(k) plan.

    Sub-section 7702 of the IRC is mostly similar in that respect. As products and financial instruments have evolved to create security, growth potential, and risk mitigation the 7702 will become the 401(k) with the exception that it will work.

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