In this article, we’re discussing the TFRA account or Tax-Free Retirement Account.
As discussed below, a TFRA account is not a bank account. But, it is a common investment strategy used by individuals in a higher tax bracket.
With this in mind, we’ll look at TFRAs and share some of the most important considerations for anyone considering setting up a TFRA below.
This article is part of our free series on how to open a bank account, which covers bank accounts, investment accounts, and retirement accounts.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- TFRA Account
- Who Can Open Tax-Free Retirement Accounts?
- Benefits of Opening a TFRA
- What Are the Qualifications for a TFRA Account?
- Frequently Asked Questions
- Ready to Explore Your Options?
TFRA Account
TFRA account or Tax-Free Retirement Account is a type of investment account that offers account holders tax-free income in their retirement. In most cases, a TFRA is viewed as a supplementary retirement account, in addition to a person’s 401(k) or individual retirement account (IRA).
That said, despite the name, it’s important to point out that a TFRA is not actually an account in the traditional sense. Instead, a TFRA is a life insurance contract that can deliver tax-free income in retirement.
Additionally, there are a few differences between a TFRA and other retirement accounts. First, contributions to a TFRA will be taxed. So, there is no tax efficiency gained by choosing to contribute capital to a TFRA, at least not at the outset. But, the potential tax savings over the long term can be substantial.
In fact, a TFRA is the only retirement account that offers tax-free gains, tax-free retirement income, and tax-free transfers to your beneficiaries. In other words, it can be a very attractive tool to receive and pass on wealth in a tax-efficient manner.
Of course, as with any retirement or tax planning initiatives, it’s important to speak with a qualified advisor to help you determine which opportunities are best suited to your needs.
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Who Can Open Tax-Free Retirement Accounts?
Anyone that qualifies for a life insurance plan in the United States can qualify to open a tax-free retirement account. That’s because TFRAs are life insurance policies, with added benefits.
However, it’s important to note that there are certain people that TFRAs are better suited to than others. In particular, individuals expected to be in a high tax bracket in their retirement will likely benefit from a tax-free source of retirement income, which a TFRA can provide.
Client Groups That Can Open Tax-Free Retirement Accounts
- Individuals expecting a high retirement income tax bracket
- Individuals already maximizing other retirement strategies
Benefits of Opening a TFRA
The benefits of opening a TFRA include the man tax efficiency gains referenced above. However, there are a number of other benefits that can be gained when opening a TFRA as well, ranging from cost-effective fee structures to limited volatility. We’ll explore some of these key benefits in greater detail below.
Retirement Planning
Retirement planning can be made easier with a TFRA as there are fewer restrictions on when and how you can access your capital. In fact, a TFRA also allows for early withdrawals, there is no age restriction on withdrawals, and there are no restrictions on how much you can contribute.
Long-Term Investment Planning
Long-term investment planning is made simple with a TFRA because it is a fixed contract. In other words, because a TFRA is a life insurance policy, it includes a locked-in return that is not subject to the volatility of the stock market.
Minimize Taxes on Retirement Income
As mentioned, one of the biggest benefits of a TFRA account is the tax benefits that can be accessed. While taxes are paid on money contributed to a TFRA, there is no tax on gains, withdrawals or retirement income, or on distribution to your beneficiaries when you die.
Frequently Asked Questions
Below are two of the most common questions that we receive from people looking into opening a TFRA Account. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
Are TFRA Accounts Legit?
Yes, TFRA accounts are legit when used correctly and set up with the help of a professional advisor. Of course, it’s important to ensure that a TFRA fits into your overall retirement plan. This includes making sure it is suitable for you based on your expected retirement income.
How Does a TFRA Account Work?
TFRA accounts work like a Roth IRA. However, TFRAs do not face the same restrictions that are imposed on an IRA. Instead, they are much more flexible and are a life insurance policy that offers considerable tax benefits in retirement.
Ready to Explore Your Options?
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