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If you don't fully understand what they're selling, you probably shouldn't be buying.

Question: My realtor and an investment adviser are trying to sell me on something called a 7702(a) Private Plan. As I understand it, it’s a retirement savings plan that doesn’t give me a tax deduction now but allows me to save taxes later. Have you heard of this and, if so, what are your thoughts on it? —Mike, Lauderhill, Florida

Answer: If you start poking around on the Internet, you’ll find a number of people touting what they variously refer to as
or 7702(a) private plans. The first thing you’ll notice is that they’re not shy about touting the putative benefits of these plans - No contribution limits! Tax-free income! No withdrawal requirements!

Nor are they above insinuating that these plans are somehow endorsed by the government. The phrase “IRS-approved” comes up a lot.

What you won’t find, though, is much information about what these plans actually are and how they work. The descriptions are vague at best. It’s all very mysterious, as if they don’t want to reveal the secret sauce. I came across one site that features a presentation consisting of 125 Powerpoint-like slides that gives virtually no specifics other than the less-than-helpful revelation that “7720(a) is something different.”

Maybe the reason for the big-hype-no-details approach is that this isn’t a revolutionary new idea. It’s pretty much a big sales pitch to get you to buy a life insurance policy and do your investing within it - a concept that has been around for years. All the “IRS-approved private-plan” mumbo-jumbo is just a gimmicky way to market it.

As for the 7702 and 7702(a) references, they’re not some Maxwell Smart secret-agent passwords. They just refer to sections of the Internal Revenue Code that regulate the taxation of insurance policies.

When you strip away all the hype, the pitch boils down to this: Buy a life insurance policy and pay extra premiums beyond what’s necessary to fund the policy’s insurance protection, or death benefit. Depending on the type of policy you use, those extra premiums can be invested in mutual-fund like portfolios or other investments which build “cash value” that can be tapped for retirement or other purposes.

Typically, the big lure is that instead of just withdrawing money from the policy’s cash value when you need it - and then paying tax on investment gains - you instead take out loans against the policy that will eventually be paid by the policy’s death benefit. Since loan proceeds aren’t taxable, you’ve gotten money out of the policy tax free.

There are a number of variations on this theme, one of which is to convince you to fund the policy by tapping the equity in your home, either by borrowing against it or selling your home and then buying another using as little of your profit as possible, say, by taking out a low-down payment interest-only mortgage. (Maybe this is how your realtor got involved in this pitch.)

On paper, these plans always look terrific. But in real life there are a number of potential hitches you need to be aware of.

To start with, you are buying insurance you may not need, which adds to your costs and detracts from your return. (If you do need life insurance, you can likely get it at a lower cost than what you’ll pay in these policies.) And even beyond that expense, insurance policies are typically loaded with marketing and sales fees. Then there are the costs of the investments themselves, which in my experience can often be quite a bit higher than what you would pay for similar options outside a policy.

And if the pitch involves borrowing against the policy’s cash value, that raises another risk. If you borrow and later let the policy lapse - say, because you can no longer afford to make the premium payments - then any investment gains you’ve borrowed could become immediately taxable. That could be a real downer during retirement when you may not be prepared to pay a big tax bill.

Given the expense, the complexity and the risks, I see no reason to go along with a scheme like this if you aren’t already maxing out on tax-advantaged accounts such as 401(k)s and IRAs.

I suppose one could make a case for investing for retirement in an insurance policy if you have fully funded 401(k)s and the like and still had money to invest. But I wouldn’t make it. I’d opt instead for tax-efficient investing in taxable accounts with low-cost index funds, ETFs or tax-managed funds.

And however tempting the sales presentation may be, I’d be especially wary of getting involved in any scheme that involved borrowing against my home equity or taking on new debt in other ways to fund this type of plan.

So I recommend that you tell your adviser that as honored as you are for the opportunity to be initiated into the secret society of 7702(a) private plans, you’ll pass in favor of more conventional methods. What 401(k)s, IRAs and tax-efficient funds and ETFs lack in mystique, they more than make up for in transparency and lower fees. And that’s a big advantage when it comes to investing for your retirement.