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401k vs IUL; Both Indexed Universal Life accounts (IUL) and 401K accounts are generally used as retirement vehicles. (IULs, however, don't have to be reserved purely for retirement, which is one of their advantages.)
But how do these two different products match up with one another? What are some key differences to consider between an IUL versus a 401K?
1. First, self-employed entrepreneurs and 1099 contractors are not offered 401Ks through an employer. So a 401K is simply not an option for many people in the work force. If you are an independent contractor, responsible for your own retirement, one of your best options is going to be an IUL because it balances great upside potential against risk of losing money with your investment.
2. 401Ks are typically funded with pre-tax dollars set aside by your employer. Thus, your contribution to your 401K is deposited before Uncle Sam can get his cut.
IULs, in contrast, are funded with post-tax dollars (for the majority of the population). So, even if you are employed and receiving a paycheck, your contributions to an IUL have already been taxed.
Why is this an important distinction? Well, when you reach retirement age (59.5 years old) and you want to start drawing money from your 401K, Uncle Sam says, "Now wait a minute ... I never got my share. So I have to get my share now." The result? Right when you retire -- right when you stop working and begin withdrawing from your 401K -- you will start being taxed on those withdrawals. Uncle Sam wants his long-awaited cut from your retirement income.
Now ponder what you think is more likely: that taxes will go up or go down by the time you retire? If history teaches us anything, then it's probably fair to predict that taxes will be higher when you retire. In other words, you will likely be taxed more in the future than you are taxed in the present. You will likely pay more in taxes 20-30 years down the line, in retirement, than what you are being taxed right now.
So this is what I consider an advantage to an IUL account: you have generally already been taxed (or will pay taxes along the way at tax time) while still in your income-earning years and, most likely, at a lower tax rate than in the future.
3. Another factor to consider: 401Ks are directly invested in the stock market while IULs are only indexed to the stock market. This is important because, with 401Ks, you participate in the ups and downs of the stock market ... for better ... or for worse. Yes, people lose money in their 401Ks all the time.
However, with an IUL, you only participate in the ups of the market. Whenever the market that is being indexed by the IUL goes up, your IUL account grows and increases in value. But whenever the market goes negative, your IUL account simply pauses on growth. Your IUL will not increase in value from market returns when there are none but, just as important as gains, you will avoid all losses.
Not a bad proposition at all.
4. 401Ks are generally only built for retirement. If you want to withdraw any of the funds pre-retirement, you will pay not only taxes but also penalty fees. That's right -- you will be penalized just for accessing your money before the official retirement age of 59.5. Depending on a number of factors, the costs for making early withdrawals from a 401K can add up to 40% of more of the value of your withdrawal.
On the other hand, IULs don't have to be used for retirement. You can use them for whatever you want such as starting a business, fixing a roof, installing a swimming pool, growing a child's college fund, etc. You don't have to wait for retirement age to access your money without penalty. And you can own multiple IULs ... as many as you want.
5. IULs come with the added bonus of a life insurance policy. So, if you prematurely transition, your beneficiaries will receive a tax-free inheritance to help financially cushion your loss to the family (i.e. pay off a mortgage). You're never going to get that from a 401K out of the gate.
So in Conclusion,
I think for anyone looking to create a retirement vehicle, an IUL is probably the better choice in a portfolio for someone who wants to avert the risk of losing money in the stock market. Also, anyone who wants to have access to their money without penalty fees, should they need it before 59.5 years of age, will probably prefer an IUL. And lastly, if you believe that taxes will probably continue to rise in the future -- and you'd rather pay tax now while you are earning income rather than pay taxes in retirement when you are usually on a fixed income -- then an IUL is probably better suited for you.
These are the major considerations of an IUL versus a 401K. If you choose to open an IUL, my office would love the opportunity to help you with this. Please understand that I am reachable by phone or email 365 days of the year, 24 hours per day. Leave me a message and I promise I will call you back if I'm not immediately available.
It's never too early to start planning for your retirement. Please share my website with your friends and family who may be already searching for this information. Most people are very appreciative to receive this kind of information.
844.711.1130 ext. 1
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Read: IUL vs Roth IRA