If you are looking for a long-term investment that reduces the tax on retirement income, then a tax free retirement account is the best option. This is also known as TFRA.

Tax planning is always a key factor to consider when it comes to retirement planning.

So, this guide will go through the comprehensive details of tax-free accounts and their benefits.

What Is A Tax Free Retirement Account?

a senior person counting money

A tax free retirement account is a type of investment plan designed to provide tax free income for retirement. It is mentioned in the Section 7702 plan.

Remember, this is not a qualified retirement plan; it is not an employer-sponsored one. Instead, people individually owned the tax-free retirement plan.

Usually, the TFRA is funded after-tax dollars. Besides, the account owner can take tax-free loans against the savings during their lifetime.

While the cash value of savings depends on the underlying investment strategy.

However, the TFRA is not a qualified plan like an IRA (Investment Retirement Account), so it is not subject to the same tax rules as those plans.

For instance, if you need to take out the funds policy before 59 ½, you don’t need to worry about withdrawals as it has no early withdrawal policy like other plans that deduct 10% from the saved money. Moreover, the income generated from your savings is also tax-free.

Compared to the IRA or 401K, TFRA has many advantages. If you are considering creating a TFRA, you should learn the benefits you will get from it.

But what is the benefit of having a tax free retirement account? Let’s talk about this in the following section.

Benefits Of Tax Free Retirement Account

A senior person talking to a banking agent

Knowing the benefits makes it easier for you whether you want to depend on a tax-free account.

The Principal Amount Is Not Taxable

The main benefit of TFRA is the principal amount is not taxable. But if you choose a 401(k) plan, you must pay taxes on your earnings when you want to make any withdrawals before retirement.

Liquidity Option

In addition, TFRA provides great liquidity and has no tax penalty against it. At the same time, this lets you generate additional income without paying any tax on the income; this is very convenient.

Your Beneficiary Will Be Benefited

Another incredible benefit of this type of account is that you can use the account for your whole life. That means your beneficiaries can get death benefits when you pass away.

Floor Function

Tax-free retirement has a “floor” feature, which means your TFRA is indexed to the market. But the TFRA is not in the market. So, when the market price increases, you will profit from it. Besides, if the market price drops, this won’t affect your savings.

No Restrictions

TFRA has no restrictions like IRA, so you will get access to the funds before your retirement age. This feature makes this plan a very popular choice.

However, TFRA is a long-term investment; thus, you can choose this retirement plan.

And these were the benefits of TFRA. But it also has some disadvantages. Following we’ve mentioned the details –

What Are The Disadvantages Of TFRA?

a briefcase full of dollars

Tax-free may sound great, but you should also consider the disadvantages of TFRA.


The tax-free account is life insurance; also, it offers cash value. Hence, it is slightly more expensive than traditional tax-free accounts.

Management Fees

You must pay the agent commission administrative management costs for the tax-free account. This is an additional cost you have to carry if you choose TFRA.

So, tax free accounts have more advantages than disadvantages. Thus, you can consider these minor disadvantages if you want the best benefit from your requirement account.

How To Create A Tax Free Retirement Account?

2 senior person talking to a banking agent

If you are interested in using TFRA, you can talk to your financial advisor. Or either you can talk with an insurance agent to learn about the process.

When it comes to TFRA, there are some guidelines under section 7702 that should be followed.

Your financial advisor will review your overall financial situation to determine whether you are eligible for the tax-free account. Also, he will check out your situation to determine –

  • Depending on your current retirement account, what would be your tax liability?
  • What benefits will you get from the TFRA?
  • By using the retirement account, how much income would you create?

In addition, if you have any questions, you can ask your advisor. Furthermore, you can ask your advisor about how much life insurance you might need.

For people who want to leave tax-free assets for the next generation, a tax free retirement account is the best option to go for.

Do you want to know What is communication service tax? Check out this guide.

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