What is a TFRA?
A TFRA, or Tax-Free Retirement Account, refers to a financial strategy where certain retirement savings vehicles provide tax-free income during retirement. Unlike traditional retirement accounts such as 401(k)s or IRAs, which are tax-deferred, TFRA strategies focus on investments or accounts that do not incur income tax upon withdrawal, typically using tools like cash value life insurance.
The most common example of a TFRA is the use of permanent life insurance policies, such as whole life or indexed universal life (IUL). These policies allow the cash value to grow tax-deferred, and policyholders can access the accumulated cash value through tax-free loans or withdrawals, as long as the policy remains active. This approach provides a tax-advantaged income stream in retirement, avoiding the traditional tax burdens associated with qualified retirement accounts.
While TFRA is not an officially recognized retirement account type, the strategy is popular for those looking to diversify their tax treatment in retirement, providing flexibility and potentially higher tax savings. However, using life insurance for tax-free retirement planning requires careful structuring to avoid negative consequences, such as lapsing policies or Modified Endowment Contract (MEC) status.
TFRA strategies are suitable for individuals seeking to supplement traditional retirement savings with tax-free income and wanting to leverage the benefits of permanent life insurance as part of a broader financial plan.