How do IUL’s stack up? It’s time for an IRA vs IUL | Reading showdown!
Most people planning for retirement believe that 401(k) and IRA plans are the best strategies for retirement. I get it, they’re popular. But in the last 20 years, we had two major market crashes. Understandably, many working professionals worry about the long-term safety of their money. But with its contribution limits, costly tax implications, and investment options’ exposure to market risk, the IRA can be unseemly for careful savers.
I’ve spoken about Indexed Universal Life (IUL) plans as an alternative to Roth IRA’s in particular however, and how they’re competitive.
But how good or bad an alternative is an IUL, versus an IRA? The answer is, of course, it depends. No one can say for sure, because no one can tell the future of how the market and investments will fare.
I can, however, base projections off of current rates, using myself as an example. Some parameters:
- I’m a 40 year old male in relatively good health. For the IUL, I’d expect to get a Preferred Non-Tobacco rating (the second-best rating, not the best).
- I’m starting with zero invested in either today, and adding $500/month from now until age 69.
- I’m using the current interest rate on a typical IUL product, now at 8.26% EOY. There are no fund management fees.
- I’m using an optimistic 7.0% rate of return on a IRA, but subtracting 0.5% for fund management fees.
- I’m assuming that markets are steady and not fluctuating, because chaos is hard to model.
- And, I’m assuming that taxes will stay at their current rate for someone with an annual income of 100k/year.
Lots of assumptions there, but let’s see where that gets me.
IRA vs IUL | Reading: The Results
IUL: $500,579. No taxes taken out, because it’s paid for with after-tax dollars.
IRA before taxes: $630,000. After taxes (25% bracket): $472,500
Those taxes really hurt!
Some thoughts to consider:
Taxes: Given current federal fiscal deficits, do you think income taxes are staying where they are or going up?
Early withdrawals: If something happens to me and I need the cash value of the IRA before retirement, I’d pay large tax penalties from the IRA. No penalty for early withdrawals from an IUL.
Probate: If I were to die young with an IRA, my investment would probably be stuck in probate.
Life Insurance: If I were to die young with an IUL, my family would get the death benefit almost immediately. My death benefit at this level would start at $411,000, and go up steadily as I approach my golden years.