IUL vs. 401(k): Is an IUL (Indexed Universal Life) better than a 401(k)? The answer is yes—but only if it’s structured properly. We are going to explain how to set it up so it can outperform a 401(k) by as much as double or even quadruple your net spendable retirement income.

To achieve these goals, We will use the financial vehicle, which we call the Laser Fund. Laser stands for Liquid Asset Safely Earning Returns. But what it really is, is a max-funded, tax-advantaged insurance contract. We are going to explain why it will knock the socks off a 401(k).

But before we dive into the Laser Fund, let’s first break down what a 401(k) is, its features, and why so many people get duped into pouring their money into it.

The Problem with 401(k)s

Many of the original champions of 401(k)s, as well as financial pundits, have recently expressed regret. In fact, a Wall Street Journal article revealed that some even lamented the day they ever came up with the idea. The 401(k) was originally designed for specific situations, but it suddenly became the default retirement plan for everyone.

The reality is, many people are going to outlive their money because of what most 401(k)s fail to deliver. To understand why, let’s first look at the features of a 401(k).

Features of a 401(k)

When people contribute to a company-sponsored 401(k) plan, they often just follow the herd. Everyone else is doing it, so why not? You meet with your HR person, and they tell you, “If you contribute 4%, the company will match 50 cents on the dollar. And if you contribute more, they’ll match another 2%.” And people think, “Oh, that sounds good to me.”

The lure of a 401(k) is that you’re using pre-tax dollars. You get a tax break on the contributions you make, and that money grows into a larger sum over time. But here’s the catch: when you retire and start withdrawing that money, you’ll have to pay taxes on it. The assumption is that you’ll be in a lower tax bracket by then.

The Tax Trap of 401(k)s

The whole premise of a 401(k), or an IRA, 403(b), or 457 plan, is that you get a tax break during the contribution phase. The money you put in grows tax-deferred—not tax-free. And when you eventually access that money, it’s time to pay Uncle Sam (You know IRS). In 41 out of 50 states, you’ll also have to pay state income tax on whatever you withdraw.

Most people think, “Well, I’ll be in a lower tax bracket when I retire.” But that hasn’t been true for over 25 years. In fact, it took the financial services industry until just a couple of years ago to finally admit that this was bad advice. Most people are not in lower tax brackets when they retire.

Why? Because they’ve been eliminating their deductions along the way. For example:

• You pay off your house, so you lose the mortgage interest deduction.
• Your kids grow up and move out, so you can’t claim them as dependents anymore.
• If you’re a business owner, you lose certain deductions.
• And on top of that, Congress keeps raising taxes.

Most people agree that taxes will likely be higher in the future. So, why would we want to postpone paying taxes by contributing to a 401(k), only to withdraw the money later when we’re in the same or even higher tax bracket?

The Worst Place to Leave Your Money

Here’s another critical point: the worst place to leave your money when you die is in a 401(k) or an IRA. Yet, what do most people tell you to do? “If you don’t need the money, leave it there until you’re 72, and then take out your RMDs (Required Minimum Distributions).”

That’s the worst advice you can have. Why?

We have helped many people get their money out of 401(k)s in as little as five years, paying the taxes at today’s lower rates. The key is to reposition that money into something that’s tax-free from now on.

So, when people ask, “Is an IUL better than a 401(k)?” the short answer is: if you have the choice between putting money into a 401(k) or an IUL and especially if you’re not being matched, I would choose the IUL every time. Why? Because, when properly structured, an IUL will likely earn a higher rate of return, it’s completely tax-free, and it offers benefits that even a Roth 401(k) can’t match.

A Roth 401(k) has two benefits, but an IUL has six. So, why would you want to put money into a 401(k) when you can enjoy far greater benefits with an IUL even compared to a Roth 401(k)?

The Employer Match Illusion

Now, some people get confused because they say, “My employer matches 50 cents on the dollar.” That’s nice of your employer, but let’s break it down. If you contribute a dollar to your 401(k), and your employer matches 50 cents, you now have $1.50. But when you withdraw that $1.50, you’ll owe taxes on it—about a third, or 50 cents, if taxes are at 33%.

In other words, your employer’s match is essentially covering your future tax liability if taxes stay at 33%. But here’s the problem: the General Accountability Office (GAO) predicts that taxes could rise to 50%, 60%, or even 70% in the future. So, even a 50% match might not be as great a benefit as it seems.

The Over-Contribution Problem

Many people say, “I’m contributing 8% or 10% to my 401(k), but my employer only matches up to 4%.” You should ask them, “Why are you contributing more than what’s being matched?” And they say sometimes, “I didn’t know where else to put it.”

The truth is that you should never contribute more to a 401(k) than what’s being matched. Any additional money should go into an Indexed Universal Life (IUL) insurance contract.

Benefits of an IUL vs. 401(k)

So, what makes an IUL far better than a 401(k)? Let’s break it down.

1. Non-Qualified Plan Flexibility

A 401(k) is a qualified plan—qualified by the IRS. That means it comes with strings attached:

• You can only contribute a certain dollar amount or percentage of your income each year.
• You can’t touch the money before age 59½ without a 10% penalty on top of taxes.
• By age 72, you’re forced to start taking Required Minimum Distributions (RMDs), or you’ll face a 50% penalty on top of taxes.

The IRS treats your 401(k) like a savings bond—they’re counting on taxing it when you withdraw the money.

An IUL, on the other hand, is a non-qualified plan. It doesn’t have these restrictions. You can design an IUL to accommodate $100,000, $200,000, or even $1 million per year in contributions. Whether you’re putting in $1,000 a month or $1 million a year, an IUL gives you that flexibility.

2. Contribution Flexibility

With an IUL, you don’t have to contribute the maximum amount every year. If you design your IUL to allow $300,000 in contributions but only put in $10,000 or $30,000 one year, the unused room ($270,000) isn’t lost. You can make up for it in future years—whether you inherit money, sell a business, or have a banner year.

This is a huge advantage over a 401(k), where if you don’t use your contribution room in a given year, you lose it forever.

3. Access to Your Money

With an IUL, you can access your money at any time, for any reason, without penalties. If you contribute $300,000 and need $250,000 just 30 days later for an emergency or a real estate opportunity, you can take it out. You don’t have to prove hardship or jump through hoops.

This flexibility is a game-changer. You can put money in, take it out, and still benefit from the power of indexing. The downside is that you have to be pretty disciplined to stick to your plan.

How Indexing Works in an IUL

Indexing is what sets an IUL apart. When the market performs well, you benefit because your returns are linked to an index, like the S&P 500, CAC 40 or the Dow Jones. But here’s the key: your money isn’t directly invested in the market. The insurance company keeps it safe.

If the economy crashes, you don’t lose a dime (in theory if your insurance company doesn’t go bankrupt). If you have a million dollars in your IUL, you still have that million dollars, even if the market drops 40%. But if the market gains 10%, 20%, or even 40%, you can earn a portion of those gains often up to a cap of 16% or 25%.

If the market loses, you don’t lose. Your money isn’t at risk in the market. It’s held by the insurance company, earning the general account portfolio rate—even if that’s only 4% or 5%. For example, on a million dollars, that’s $50,000 a year in interest.

But here’s the magic: You can tell the insurance company, “Take that interest and use it to buy upside options. If the market goes up, pay me 10%, 15%, or even 25%. If I guess wrong and the market goes down, I’m okay with relinquishing that interest.” But you never lose my million dollars.

This is the power of indexing. It allows you to earn money when the market goes up and not lose a dime when the market crashes.

Average Returns in an IUL

This strategy allows many people to earn average rates of return between 7% and 10%. In fact, many people have averaged 11% gross, netting 10% after costs. The cost of insurance and other fees typically only drains about 1 percentage point. So, if you earn 11%, your net 10%.

Now, show me a 401(k) that earns 11% and nets you 10%. If a 401(k) earns 11%, after taxes, you’d be lucky to net 6% or 7%. If you earn 12% in a 33% tax bracket, you’d only net 8%. And don’t forget, most 401(k)s charge about 1% in asset management fees. So, if you earn 12%, you’re only netting 7%.

With an IUL, you only have to earn 8% to net 7%. But you can earn 11% and net 10%. That’s why we believe the IUL is far superior.

IUL vs. 401(k): Why an IUL Beats a 401(k) ?

An IUL offers greater flexibility, more predictable tax-free returns, and protection against market volatility. And when inflation happens, it helps you because your returns are linked to the things that are inflating. So, why would you choose a 401(k) over an IUL? I don’t know.

What About a Roth?

Now, people often ask, “What about a Roth?” It’s a legitimate question. A Roth is a step in the right direction, but it’s still a qualified plan with strings attached:

• You can only contribute a certain dollar amount or percentage of your income.
• You can roll money over to a Roth, but it’s a one-time lump sum.
• You have to wait five years and reach age 59, ½ to access your money without penalties.

Roths have two benefits:

1. 1) You fund them with after-tax dollars.
2. 2) They grow and can be accessed tax-free.

An IUL has those same two benefits and has had them for over 100 years in the Internal Revenue Code. But it also has four additional advantages:

1. Lump-Sum Flexibility: You can contribute large lump sums at any time.
2. Catch-Up Contributions: If you don’t use all your contribution room in a given year, you can make it up later.
3. Immediate Access: You can put money in and take it out 30 days later without penalties.
4. Death Benefit: If you pass away, your IUL blossoms in value. For example, if I die at 68 with a million dollars in my IUL, it could grow to $2.5 million and transfer income tax-free to my beneficiaries.

Why would I want a Roth when I can have the two benefits of a Roth plus four additional advantages that Roths will never or don’t have?

In some: IUL vs. 401(k)

We believe an IUL knocks the socks off any 401(k). It blows them out of the water. Other than that, we don’t have any strong feelings on the subject.