A tax-free retirement account or TFRA is a retirement savings account that works in a similar way to a Roth IRA. Taxes must be paid on contributions that go into the account. The growth of these funds is not subject to taxation. Unlike a Roth IRA, a tax-free retirement account has no retirement restrictions regulated by the IRS.
Unlike a 401k or Roth plan, a TFRA has a ground zero. When you use an IUL, your money is indexed in the market and not actually in the market. If your indexing strategy increases, you will be credited with the profit based on the strategy selected. If the market falls, its ground zero prevents market losses.
Your money is locked, so instead of trying to recover losses, you're in a position to grow your money. When properly funded, you can generally expect a revenue stream of 20 to 40 percent greater than that of a qualified plan. A TFRA is funded with after-tax dollars, similar to how a Roth IRA would be funded. The cash value of the policy increases with deferred taxes and policy owners can apply for tax-free loans starting at that cash value during their lifetime.
The amount of cash value that accrues within the policy may depend on the underlying investment strategy. The biggest difference between a tax-free retirement account and a 401,000 is that contributions to a TFRA are made with after-tax dollars, while contributions to a 401 k are made with pre-tax dollars.