If you are creating your retirement plan, then make your pick carefully. The two popular choices for retirement plans are IUL (Indexed Universal Life Insurance) and employer-sponsored 401K. Choose a plan that can help fund your long-term savings goals and meet your requirements. This will help you in effective retirement planning.

As an independent insurance agency American Group Life Insurance is focused on helping clients make the best retirement plan selection with transparency. An IUL is a permanent life insurance and investment policy, while 401K is an investment plan. Both plans nonetheless offer potential gains to the insured.

To help you get started, here’s how IUL differs from 401K:

Tax Benefit

A 401K plan allows you to invest your money on a tax-deferred basis. Plus, you also enjoy a tax deduction for contributions. Please note that though you will get tax advantages on the 401K plan, income tax is payable on withdrawal. Also, you will be required to take out monthly contributions from your 401K plan and pay tax at a certain age.

On the other hand, IUL (Indexed Universal Life Insurance) gives you death benefits while accumulating cash value which you can borrow against. Also, you don’t have to pay any amount of income tax on the withdrawal.

Guarantees Offered

With Indexed Universal Life Insurance, you get certain guarantees. The policy offers guarantees on the policy performance. You will have:

• No laps
• Guaranteed death benefit
• Saving never run out as long as you live
• Pay no income tax on interest accumulated in cash value
• Add several riders for financial protection under unexpected circumstances
• Protection from loss when the market crashes or dips thanks to the fixed floor rate

However, the 401K plan doesn’t offer all these guarantees. There is no protection from loss in 401K when the market is in a downward swing.

Here, it is essential to understand that the cash value depends on the index performance in the Indexed Universal Life Insurance policy. But you will not lose single dime even when the market crashes because the gains are locked annually. This makes IUL a preferred option.

Contribution Limits

When it comes to IUL vs. 401K in terms of contribution limit, IUL leads the way as the policy has no contribution limits. But with 401K, you can only contribute to about $19,500 annually. The plan gives flexibility to those over 50 years of age. They are allowed an additional $6000 in catch-up fund for retirement. Likewise, the employer contribution is capped at $36,500 annually.

Simple and Straightforward

If you’re looking for a simple plan and nothing complex, then 401K is a better choice. The plan allows you to save money from the paycheck pre or post-tax. You can lose money when market goes down. The employer can contribute. However, IUL is slightly complex as it can be customized with a variety of options. You can make things complex if you include too many options in the plan.

Please note that 401K is a qualified plan with IRS. This means that there is a contribution limit per year and that you can’t touch the money before you are 59 ½. Other limitations include a 10 percent penalty on top of tax, and at the age of 72, you may be required to take RMD (required minimum distribution). With IUL is life insurance and cash saving plan – two in one. There is no age limit when you withdraw or take loan from your saving plan. Pay no income tax on cash accumulated over the years. For more information or to navigate through your options, contact our insurance agent. Let us help you make the best decision and plan for retirement strategically.