We all know that the marketing of certain products and investments may stretch the actual truth. When it comes to some of the advertisements for 770 accounts, this might be the case. According to Bonnie Lee’s Fox Business article, “The Tax Story Behind 770 Accounts,” these accounts are not actually a secret way to get rich fast as some ads claim. One particular ad claims that banks and wealthy people use 770 accounts in order to gain up to 40% more interest than you can receive in other bank accounts. It also says that the withdrawals or interest from the account are tax free. The author says that these claims are misleading and recommends speaking with a financial expert to learn the actual benefits and downsides of a 770 account.
IRS Code 7702 covers all life insurance contracts. This is where the term 770 accounts originates from. The IRS guidelines related to this section of their code can be found in the Fox Business article. Basically, a 770 account is actually a life insurance contract that you use as a savings account. Before receiving any tax free disbursements from the account, you have to have it fully funded. The reason that your withdrawals are not taxed is because you are taking the money out as a loan that you will repay to your account at a later date. Money received from loans is never taxed because it is not considered taxable income by the IRS. Interest, however, is considered taxable income. The exceptions to this last rule include interest that is earned within qualified retirement accounts like 401k’s or IRA’s. That interest (and the rest of the distribution) is taxed when you start receiving income from the plans.
One financial expert explained 770 accounts, also known as infinite banking, as borrowing money from yourself. You borrow money from your life insurance contract when you need it to buy a new car or fix up your home. Since you are borrowing the money from yourself, you earn the interest. You are paying yourself back rather than paying back the bank with added interest costs. This expert says that these types of life insurance contracts are often beneficial, but cautions you to know the details before getting into a contract. Make sure you know whether the loan’s interest rate is fixed or variable and how much you will make from the loan. If your loan rate is contractual then it will not change, but a current practice rate can be changed at any time.
770 accounts should be used just like any other financial vehicle. You have to know the pros and cons and speak with an expert before getting into a contract. There may be tax benefits to taking a loan from a 770 account rather than taking money out of another investment. The interest you’ll receive could be beneficial as well. But keep in mind that there really are no “get rich quick” or “secret tax-free investments” to be found. Each financial product you choose has to meet your personal needs and match up with your future goals.