Blog #61: Sacrificing Cash Flow with a 401(k) Plan

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Joe Tanner, age 35, is making an annual contribution of $17,500 to his company’s 401(k) plan, and his employer matches the first $2,500. ?Can you make a case for diverting the after tax cost of the $15,000 beyond the employer’s?match into a personal retirement plan?


In Joe’s 30% marginal tax bracket, the after tax cost of putting that last $15,000 into his 401(k) plan is $10,500.  Let’s see if we can enhance retirement cash flow by contributing the $10,500 to an increasing death benefit Indexed Universal Life (IUL) policy with an initial face amount of $315,000.  We’ll then compare it to keeping the $15,000 directed to the 401(k).  The results may surprise you -- and Joe even more.

A level death benefit of $900,000 using the same premium of $10,500 could also work.  It develops slightly lower retirement cash flow, but the increased death benefit could be well worth it.


Check out the two graphics below:


blog-61-graph-1-cumulative-after-tax-cash-flow-tax-deductible-retirement-plan-image


blog-61-graph-2-cumulative-payments-tax-deductible-retirement-plan-cash-value-and-death-benefits-image


Click here to view the full illustration.


The IUL has the same $10,500 premium as the after tax deposit to the 401(k) in excess of the employer?s match.  Beyond that, the differences are significant:

  • Unlike the 401(k), the IUL provides a significant death benefit for Joe’s family.
  • Unlike the 401(k), a waiver of premium can be attached to the IUL in the event of disability.
  • Unlike the 401(k), tax free cash flow (loans) from the IUL can be accessed prior to age 59 1/2 with no 10% premature distribution tax.
  • Unlike the 401(k), the IUL is illustrated to maintain its values through age 95. At the end of the analysis, the IUL illustrates 283% more after tax cash flow plus remaining cash value in excess of $645,000 wrapped up in over $736,000 of death benefit.

The 401(k) doesn’t stand a chance of competing once you evaluate two issues:

  • 30% of the money in Joe’s 401(k) belongs to the IRS;
  • IUL with participating loans is a very powerful financial instrument.

Conclusion:


Every client with a 401(k) contribution in excess of the company match should consider the IUL alternative.


Further, it does not just apply to a 401(k).  Anyone with an IRA, a Keogh, or a 403(b) plan is a candidate for the life insurance alternative.  In addition, any employer with a classic profit sharing plan should consider personally-owned IUL as an alternative.


Important Note: ?Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.


Licensing


To license Wealthy and Wise and/or the InsMark Illustration System, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President ? Sales, at dag@insmark.com or 925-543-0513.


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