• BY amfcon
• 18 Dec 2022 INSURANCE

When it comes to retirement savings and taxes, there are two things that come to everyone’s mind: Taxable Retirement and Tax-Free Retirement. Either way, you have to pay income tax (more or less) on retirement. The farming analogy always comes in very handy for understanding taxes. Let’s say you pay income tax on one corn seed which costs 2 cents and you are going to sell this harvest for $5. But most Americans pay tax on harvest ($5) rather than on seed. The farmer pays tax on seed and does not pay tax on the harvest. This makes him a good investor.

1. A 401(k), SIMPLE 401(k), 457(b), and 403(b) are taxable retirement plans offered by many American employers. The money grows tax-deferred, and then once an investor hits a certain age, they are required to pay income tax on withdrawals, which includes contributions and growth. It’s like paying tax on the harvest. 

 Example: Every month you are saving $1,500 in a 401(k) for 23 years and you are in the 22% income tax bracket. Table 1 show, you have saved $91,080 in income tax on the premium (corn/ seed) and paid $585,749 in tax on retirement withdrawals (Harvest).  

2. 2. An IUL Investment – Life insurance with a tax-free retirement plan protects you and your family. You will contribute money after income tax to an indexed account (IUL). The cash value in policy typically grows tax-deferred and tied to a stock index, such as the S & P 500. You will not pay income tax on withdrawal at any age and you will never run out of money in your golden age. Therefore, I call this plan a “Farmer’s Investment.” 

Table 2 shows, you paid $59,019.84 income tax on the premium (Corn/Seed) in 23 years and saved $441,652.20 in 30 years during retirement (Harvest). 

Conclusion:

PART A: 401(k):

Contribution: 

With a 401(k) retirement plan (Table 1), you are saving $3,960 in income tax per year for 23 years. The total you have saved in 23 years is $91,080.  

Retirement: 

At the retirement amount of $85,000, you will pay an income tax of $18,700 per year for 30 to 35 years. In reality, you’ll end up paying a lot more income tax than you save. In 30 years you will pay $561,000.

PART B: IUL Investment Plan:

Contribution: 

With an Indexed Plan (IUL) retirement plan (Table 2), you are paying income tax on the monthly premiums. In 23 years it comes out to $59,019.84.

Retirement: 

Pay NO Income Tax. Mean $0.0 tax. 

                                   Tax Paid – IUL Investment VS 401(k)