Section 7702 vs Roth Conversion
Two Paths to Tax-Free Retirement
Both strategies create tax-free retirement income, but they serve different purposes. Section 7702 is for NEW savings with no contribution limits. Roth conversions move EXISTING 401K/IRA money to tax-free status.
Quick Comparison
| Feature | Section 7702 Plans | Roth Conversion |
|---|---|---|
| Contribution Limits | None (limited by insurability) | $7,000/year direct ($8,000 if 50+) |
| Income Limits | None | None for conversions (limits for direct Roth) |
| Tax on Contributions | After-tax dollars | Pay tax on converted amount |
| Tax on Growth | Tax-free | Tax-free |
| Tax on Distributions | Tax-free (loans/withdrawals) | Tax-free (after 5 years, age 59½) |
| Early Access Penalty | None (policy loans) | 10% penalty if under 59½ |
| RMDs Required | No | No (Roth IRA, yes for inherited) |
| Death Benefit | Yes (income tax-free) | Taxable to beneficiaries* |
*Roth IRAs pass to beneficiaries income tax-free, but inherited Roths have new 10-year distribution rules under SECURE Act.
The Core Difference
Section 7702: Unlimited Tax-Free Space
Section 7702 plans accept NEW after-tax contributions with no arbitrary limits:
- •Contribution Limits: None (based on insurability)
- •Tax on Funding: $0 (already after-tax dollars)
- •Early Access: Yes (tax-free policy loans)
- •Living Benefits: Chronic/critical illness protection
Best for: High earners who max out 401K/IRA and want unlimited tax-free retirement space for NEW savings.
Roth Conversion: Convert Tax-Deferred to Tax-Free
Roth conversions move EXISTING 401K/IRA money into tax-free Roth status:
- •What It Does: Converts existing tax-deferred funds
- •Tax Cost: Pay full income tax on conversion
- •Access: 5-year wait per conversion
- •Living Benefits: None (account balance only)
Best for: Anyone with existing 401K/IRA funds who wants to convert to tax-free status (and can afford the tax bill).
Different tools for different situations
Strategic Use Cases
| Strategic Use | Section 7702 | Roth Conversion |
|---|---|---|
| New Contributions | Ideal for large ongoing savings | Not applicable (converts existing) |
| Existing 401K/IRA | Cannot convert existing funds | Perfect for converting |
| High Earners (>$150K) | No limitations | May push into higher brackets |
| Timeline to Access | Varies by policy design | 5-year waiting period |
| Living Benefits | Yes (chronic/critical illness) | No |
| Asset Protection | Strong (state-dependent) | Limited |
Comparing strategies for $50,000/year
20-Year Wealth Projection
| Scenario: $50K/Year for 20 Years | Section 7702 | Roth Conversion Ladder |
|---|---|---|
| Total Tax-Free Space | $1,000,000+ (no limits) | Limited by existing 401K balance |
| Tax Cost to Fund | $0 (already after-tax) | Pay 32%+ on each conversion |
| Access Before 59½ | Yes (policy loans) | Penalties apply (with exceptions) |
| Death Benefit at 65 | ~$2,500,000 | Account balance only |
| Tax-Free Income (Age 65-90) | ~$100,000/year | Depends on balance |
Key Insight: Section 7702 has no contribution limits, meaning you can fund $50K, $100K, or more annually. Roth conversions depend on your existing 401K/IRA balance—you can only convert what you have. For high earners with new savings, Section 7702 provides unlimited tax-free capacity.
The Smart Play: Use Both Strategies
They Serve Different Purposes
For EXISTING Tax-Deferred Money:
Use Roth conversions to strategically move 401K/IRA funds to tax-free status. Spread conversions over years to manage tax bracket impact.
For NEW Ongoing Savings:
Use Section 7702 for unlimited contributions beyond 401K/IRA limits. No tax cost to fund, no limits based on income.
Many of our clients use BOTH: Roth conversions for existing money, Section 7702 for new savings.
Frequently Asked Questions
Ready for a Personalized Tax-Free Strategy?
Section 7702 and Roth conversions both have a place in a comprehensive tax-free retirement plan. Let's analyze your existing accounts, income, and goals to create the optimal strategy.