Some People Ask If IUL Is Good or Bad? It’s Excellent – and Can Outperform Other Financial Vehicles for Retirement!
Many people (even some tax attorneys, financial professionals, and CPAs) aren’t familiar with Indexed Universal Life policies as a vehicle for tax-free retirement income. As a result, they believe the myths swirling out there that say there may be drawbacks to IULs, or that they’re a bad investment.
Well, for starters, IUL isn’t categorized as an “investment” and should not be purchased as one. However, a properly structured, maximum-funded IUL policy can be a superior “financial vehicle” that provides tax-free accumulation, tax-free income, and income-tax-free transfer of wealth upon your death.
As a financial strategist for more than 40 years, I can tell you that thousands of people I’ve worked with have indeed found that their IUL policies (or what I call IUL LASER Funds) provide even more advantages than their IRAs and 401(k)s. I’ll tell you why, so you can be one of those in-the-know on IULs.
Let’s look at IUL through the lens of taxes.
In FY 2022, the federal government collected $4.9 trillion—and spent $6.27 trillion. The nation also currently carries a national debt of nearly $31 trillion. It doesn’t take a math wiz to see that Uncle Sam tends to spend more than he earns.
TAXES ARE LIKELY GOING UP
There aren’t many Americans who feel that taxes will be going down any time soon. With the strong likelihood that taxes will be going up, do you ever worry that taxes might eat up more of your money than you can spare during your golden years?
I hate to be the bearer of bad news, but you’re right to worry. Despite popular myth, during retirement, most Americans find themselves in a tax bracket that’s as high or higher than their earning years.
As they withdraw retirement income from the money they worked so hard to set aside in traditional accounts like IRAs and 401(k)s, they find they’re paying more in taxes than anticipated. They realize they’re at risk of outliving their money, especially if market volatility takes a bite of its own—like it did for the millions of Americans who saw their 401(k) account values drop by nearly 23% in 2022.
HOW TO PROTECT YOURSELF FROM TAXES
How can you safeguard yourself against the impact of unnecessary taxes?
Let’s say you want to head into retirement with $1 million set aside to cover all your needs. How can you sprint toward the retirement finish line rather than crawl, walk, or jog?
CRAWLING TOWARD RETIREMENT
Taxed-as-earned investments would be like “crawling” toward the retirement finish line. With these kinds of accounts, money set aside in taxed-as-earned investments is contributed with after-tax dollars, and any interest or dividends are taxed each year as they are earned. But the taxes don’t stop there.
Any capital gains are also taxed during distribution, and upon death your money is subject to income tax and possibly estate tax. Unfortunately this is one of the most common ways Americans save for retirement, in traditional vehicles like mutual funds and savings accounts at banks or credit unions, and typical taxable investments.
Let’s use an example to see why it is so slow-going. Let’s say you have $1 doubling in a tax-favored environment in each period for twenty periods–by the end of the twenty periods, you would end up with over $1 million. But if your dollar were doubling in a taxed-as-earned environment, where you are taxed at, say, 33.3% on your earnings, you would only have a 67-cent gain. After twenty periods, you’d only have just over $27,000. That’s a lot less than $1 million. That’s like getting 2.7% of the way around the race track.
WALKING TOWARD RETIREMENT
When you set aside money with after-tax dollars into tax-deferred investments (such as tax-deferred annuities), these kinds of vehicles are only tax-favored during the accumulation phase. Upon distribution from a tax-deferred annuity, the IRS taxes all withdrawals or distributions on a LIFO basis (which means last-in, first-out). This is like “walking” toward the finish line—you’re only going to get about one-third of the way around the track.
JOGGING TOWARD RETIREMENT
How about a nice jog toward that retirement finish line? If that sounds good, you’ll be joining the millions of Americans who set aside pre-tax dollars in traditional IRAs and 401(k)s. With these kinds of vehicles, you’re able to save with 100% tax-advantaged dollars on the front end.
But don’t forget that you must pay taxes when you access your money. You’re essentially electing to have a tax break on the front in exchange for paying tax on the back end.
SPRINTING TOWARD RETIREMENT
Now I ask, why crawl, walk, or jog when you could sprint? This happens when you contribute after-tax dollars in a tax-favored environment, when you can access it tax-free, and when it transfers income-tax-free to your heirs upon your passing. This is where unique vehicles, like a properly structured, maximum-funded Indexed Universal Life policy (what I call The IUL LASER Fund) can help you win the retirement race.
As you can see, not all financial vehicles provide the same momentum, especially with the winds of taxes blowing your way.
Now you might be thinking, “Doug, that all makes sense, but I’ve been following everyone’s advice so far, and my money is already in IRAs, 401(k)s, and savings accounts. What can I do? I’m just walking and jogging toward retirement?”
Take heart. While those vehicles can still be a valuable part of a balanced financial portfolio, you can also do a strategic rollout, repositioning a healthy chunk of your money from your traditional accounts to an IUL LASER Fund—something that we’ve helped thousands of clients do.
This way you can get your taxes over and done with at today’s tax rates, and enjoy the tax advantages of an IUL LASER Fund during retirement, which includes tax-free growth, tax-free income, and income-tax-free transfer of your wealth to your heirs when you pass away.
You can learn more about strategic rollouts in my book, The LASER Fund (details below). But for now, I urge you to consider the urgency of saving yourself from unnecessary taxes with an IUL policy that, indeed, is actually good.
If you’d like to know more, please join us on one of our upcoming webinars where we’ll delve into the tax topic even deeper. Because you deserve to use the money you set aside for your future, not Uncle Sam’s.
WANT TO LEARN MORE?
Join a Webinar
Want to find out how to avoid unnecessary taxes? Interested in more liquidity, safety, and predictable rates of return? Explore whether an IUL LASER Fund (a maximum-funded, properly structured Indexed Universal Life insurance policy) is right for you—join us for an upcoming webinar.
Watch the Video
Watch the related YouTube video to see me explain “How to Stop Taxes and Inflation from Eating Away at Your Hard Earned Savings” (and while you’re there, be sure to subscribe to my YouTube channel so you don’t miss a thing!).
Elevate Your Financial Dimension
Find out how you can improve your Financial Dimension journey and seize the liquidity, safety, predictable rates of return, and tax advantages of an IUL LASER Fund. Explore the in-depth financial strategies and learn from real-life client experiences by claiming your free copy of “The LASER Fund” book at LASERFund.com. Just pay for shipping and handling, and we will send it to you, absolutely free.