Month: July 2014 | Bob Ritter's Blog, ideas for financial service professionals

Bob Ritter's blog for financial advisors to show sacrificing cash flow with a 401(k) plan image

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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.

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