What is TEFRA?
TEFRA, or the Tax Equity and Fiscal Responsibility Act of 1982, is a significant federal law enacted to increase tax revenue and address budget deficits. The law introduced various tax provisions, impacting individuals, businesses, and the insurance industry. In the context of life insurance and retirement planning, TEFRA set forth guidelines that influence how retirement benefits and life insurance are taxed.
For retirement plans, TEFRA established limits on contributions to tax-advantaged accounts like 401(k)s and defined contribution plans. It also set minimum distribution requirements, specifying that retirees must begin withdrawing funds from their qualified plans by a certain age, ensuring tax-deferred accounts do not avoid taxation indefinitely.
TEFRA also impacted life insurance policies by defining the criteria for what constitutes a life insurance contract. These criteria determine whether a policy qualifies for tax advantages, influencing premium limits and cash value accumulation rules. Compliance with TEFRA guidelines is essential to ensure that life insurance policies maintain their tax-favored status.
Understanding TEFRA is crucial for those involved in retirement and estate planning, as the law continues to guide the tax treatment of various financial products, shaping how individuals can maximize tax efficiency in their long-term planning.
