BLOODHOUNDBLOG.COM

There’s always something to howl about

401(k)’s IRA’s & Urban Myths

In a recent post, Retirement — A New Class Being Created, I predicted a new class of retiree living a life tied to their free and clear home, with little monthly income. It inspired some interesting comments, and a question that is the inspiration for this post. One reader, Eric, was surprised to hear his 401(k) would be taxed when he retired and began taking distributions. So he asked the following question.

Help a young man out here – what tax bite do you speak of? Early withdrawal? I was under the impression that so long as a 401k built up to a certain age (65?) that it was relatively tax free?

Rain on my parade, I’m wearing my parka. :)

It’s not Eric’s fault (at least mostly) he thinks his withdrawals would be ‘relatively’ tax free. I’ve had many people in my office tell me what they know on the subject, most of it based on what some expert at work told them. But alas, it is taxed just like you’re being taxed now Eric. And if you’re not taking out what Big Brother thinks you should be by the time you’re in your early 70′s, they’ll make you take out more, or penalize your butt.

That’s when Chuchundra came in to soften things up for poor Eric. Chuchundra then offered some advice to Eric using the number one urban myth out there on the subject. In his comment, Brian Brady recognized this advise for what it was — pure urban myth. Chuchundra said:

If you have a standard, pre-tax 401K or IRA, you pay tax on your distributions. It’s considered regular income. You didn’t pay tax on the money you put in or on the capital gains that money made over the years, so you pay when you take it out. The idea being that you’ll be in a lower tax bracket when you’re retired, so the tax bite will be smaller.

Now that might very well be true for those who followed the Grandpa Economics school of How To Retire With A Free & Clear Home While Learning To Live On Coupons, but I don’t think that’s the end game Eric is shooting for. Here’s another way to put it. If your tax rate is less at retirement than while you were working, there are very few reasons why. For most, it’s simply because the actual income amount generated by your savings isn’t high enough to merit a higher income tax rate. Besides following in Grandpa’s footsteps, it could also be because you knew someone who does what I do. You’re not taxed much because the bulk of your retirement income is made up of either tax sheltered income, or tax free income. Of course, even when the shelter runs out, and it will, the amount of income is so much, you won’t care.

I’m going to resist the temptation to go all complex and sophisticated here, because it’s not justified. I’ll just invite Captain Obvious to this party instead. Here’s what he has to say: If Eric’s income tax rate is less at retirement than while he was working, it means his retirement income is about the same as when he first entered the job market — if not less. In other words Eric — this means your retiring on the salary of a well trained 23 year old bank teller — before tax.

What kinda plan produced that stellar result, eh Eric? If you work hard for 40 years, and retire at 65 at a tax rate less than you’ve been paying, something went awry somewhere down the line. Eric later added this comment:

If you were looking to put a couple hundred a month aside for a 401k or company offered retirement plan, can you address in the article what you would prefer to see it spent on? Tossed in a liquid savings account (which still offers 4-5%) until there’s enough for a small investment?

If you contribute just under $325 monthly for 40 years into your 401(k), and it’s compounded annually at 8%, you’ll end up, more or less, with about a million bucks. Using that same 8% yield you’ll be retired with an $80,000 annual income. Oops, wait a minute. Forgot just one thing.

Since you’ve bought into the whole free & clear home mantra, you now have an $80,000 income with no interest deductions, and your children are of course long gone (no deductions there). You’re retired, so there’s no tax deductions for work related travel, car expenses, classes, tools, etc. In my world we have a term for that — tax wise, you’re running around town in your boxers. Counting state and federal taxes you’ll be lucky to get away with a net of over $55,000. The tax bite is larger when you add your generous Social Security check to the mix. :)

Eric, here’s the alternative I promised you the other day.

First, immediately stop contributing to your 401(k) — it’s a scam. Government planners knew they’d collect more taxes from your generation this way. Think about the small amount of income taxes you saved over the years putting a paltry $325 a month into your plan. Now think about paying $25-30,000 a year in taxes for say, 20 years of retirement. (This means I’ve knocked you off at 85 — sorry.) You’ve paid a minimum of HALF A MILLION BUCKS in income taxes over that 20 year period! Do you think you might do better than that?

Ya think? :)

Now, since it’s Memorial Day as I write this, my normal tools aren’t available. However, I’ve done enough of these to come pretty close with the numbers.

First let’s name the vehicle I’ll be recommending to you Eric. You’ll be putting your monthly savings into Investment Grade Insurance. And no, you’re not buying insurance as you understand it. You’ll be investing into a policy that will be indexed to the S & P. The S & P has produced an average yield of, give or take, 8% a year for the last 55 years or so. You’ll no doubt agree, that’s a pretty nice track record. I’ll use my daughter as an example.

Turning 23 this July, she’ll be putting $500 a month for the next 20 years into an investment grade policy. When she’s 43 she’ll stop. If she then waits 10 more years, letting it simmer, she’ll be able to retire with an annual income of roughly $100,000 a year — for life — tax free. That’s the rough equivalent of $150,000 a year before state and federal taxes.

Do the same as my daughter. Start out with an after tax figure, based on the $325 a month used earlier. We’ll say that’s about $250. When you can afford more, increase the monthly investment. Though, like my girl, you’ll also probably have an investment real estate basket, there’s nothing like an extra $100K a year — for life — tax free — to sweeten up your retirement. :)

A note here: Another monster cool benefit this vehicle affords you Eric, is that upon your death, the built up cash value and/or death benefit isn’t even part of your estate — and therefore not taxable. Your 401(k) will be part of your estate, and, well, you know the rest. And one more cool difference — you can borrow from this policy without paying it back, and there won’t be a penalty. It just keeps getting better and better, doesn’t it?

My guess is, the urban myth about retirement income being taxed at lower rates than when folks were working, started because most folks bought into the whole Grandpa Economics myth. And as we all know — two wrongs myths don’t make a right. (sorry)

Will my daughter own investment real estate? Captain Obvious says it’s a safe bet. When she’s in her 40′s she’ll have who knows how much tax sheltered cash flow generated by real estate. By the time she’s 53 she’ll have the additional $100,000 a year tax free for life. And I’ll be Grandpa to her kids, visiting them on my dime, wherever they live.

For young men and women out there like Eric, I invite you to contact me. I’ll put you in touch with the financial planner on my team. He’ll hook you up big time. Disclosure: BawldGuy makes a total of $0 every time he refers someone to his financial planner. I don’t want his money, I want my clients to have more money in retirement.

And that’s the answer to your question Eric.

Related posts:
  • Lawrence Reed of FEE.org lecturing in Southern California in January 2011
  • Why the Housing Bubble hit some areas harder than others.
  • Rate-a-Realtor is for Ding-a-Lings

  • 34 comments

    34 Comments so far

    1. Michael Wurzer May 29th, 2007 9:29 am

      First, immediately stop contributing to your 401(k) — it’s a scam.

      Jeff, would your advice to avoid 401k investments be the same if the 401k plan includes a company match to the employee’s contributions?

    2. Robert Kerr May 29th, 2007 10:13 am

      A tax-exempt 8% return from Investment Grade Insurance?

      Tell me more, Jeff.

      Minimum buy-in, fees, risk, etc.

    3. Eric May 29th, 2007 10:41 am

      Jeff, thanks for addressing my question in such detail. I’d ask some questions regarding the liquidity of the funds contributed (locked up? or closer to a high interest savings account or cd?), but those may be best pointed to the advisor your mentioned.

      This is why I love the BHB. If only every business niche had experts at the ready to dispense experienced knowledge on a subject :)

      You’ll have mail soon Jeff – thank you :)

    4. Jeff Brown May 29th, 2007 11:51 am

      Michael – Great question. The last time this came up was last month. A referral worked for a firm matching his contributions dollar for dollar for the first 3% of his income each year.

      Let’s say you make $60K a year. That means you can contribute $1,800 each year and the company would match it – a guaranteed 100% return. But is it?

      Just understand you’re having to allow for the day you begin taking distributions — which are taxable with a vengeance. So if you build that up, it will have to be with the idea that the income generated at retirement is so great, the after tax net is larger than what you could have had using my way.

      Put another way Michael, you have to out perform me by about 50% due to the state and federal taxes you’ll be paying when the money is distributed.

      Even if you can do that, which is questionable, how about your heirs? When you pass, your plan’s remaining cash will be taxable as part of your estate, reducing dramatically how much is passed on.

      Also, you may need money at some point. If you borrow from your 401(k) the rules are pretty strict about the terms. My way allows you to borrow and not have to pay the loan back – no penalty.

      Back to your question. $3,600 a year, compounding annually at 8% will turn into a truckload of cash in 30-40 years. Are you going to do it for that long? If so, will you be ok with the much lower after tax amount you’ll get from retirement distributions?

      Look, most people view the dollar for dollar scenario as ‘free money’. In reality, it’s just prettier bait. You’ll still be paying some pretty hefty income taxes when you draw it out – that part’s unavoidable.

      It’s the most costly ‘free’ money you’ll ever receive.

      Final analysis: I get you $100,000 tax free for life. You get $80,000 before taxes which nets you around $55,000 or so. Take away the pretty pictures they paint for you, and what you’ll end up seeing is a mirage.

      This is a no-brainer.

    5. Jeff Brown May 29th, 2007 11:52 am

      Robert – Gotta get on a conference call. I’ll get back to you later this afternoon.

    6. Michael Wurzer May 29th, 2007 2:57 pm

      Put another way Michael, you have to out perform me by about 50% due to the state and federal taxes you’ll be paying when the money is distributed.

      Are the investments you are describing before or after tax?

    7. Jeff Brown May 29th, 2007 3:21 pm

      Neither Michael – they’re tax free by definition. In other words, the gross IS the net too.

    8. Michael Wurzer May 29th, 2007 3:24 pm

      Sorry, I meant are the investments made with before or after-tax dollars?

    9. Jeff Brown May 29th, 2007 3:36 pm

      After tax dollars. Though, I’ve advised many of my clients to use tax savings gained via real estate investments. I’ve always thought that was, theoretically, neither before or after tax. It was money retained via tax shelter as financing for this approach.

      By avoiding qualified plans you eliminate paying $500,000 to a million bucks in taxes in retirement. And knowing the significantly cash value will not be included in your estate at the time of your death usually provides additional peace of mind.

    10. Jeff Brown May 29th, 2007 4:08 pm

      Robert – I’m back.

      >Mutual funds, even no-load funds, cost around 1.5% a year. This runs, according to my planner, about .92% a year. There’s usually a home physical, paid for by the insurance firm. Your costs out of pocket are your periodic investments only.

      If you’re interested in pursuing this course, I’ll be glad to put you in touch with my planner.

    11. John Kalinowski May 29th, 2007 6:39 pm

      Jeff- What’s the difference between this type of product and just purchasing an annuity?

    12. Jeff Brown May 29th, 2007 6:46 pm

      Almost all the time the annuity will be taxable. I have a current client who had bought several annuities and was not a happy camper when I showed him the difference.

    13. Michael Wurzer May 29th, 2007 8:12 pm

      If the investor is using after-tax dollars for the Investment Grade Insurance, why do you say that the 401K would have to return 50% more just to stay even with that investment?

    14. Jeff Brown May 29th, 2007 8:35 pm

      If the 401(k) will yield $80,000 in retirement income, and the state/federal income tax amounts to about 1/3, they’d have to save enough in their 401(k) to yield $120,000 – which, after taxes, would yield $80,000. The investment grade insurance yields the same $80,000 tax free.

      So I meant the 401(k) income had to be 50% higher in income to yield the same after tax income as the insurance.

      50% of $80,000 = $40,000 extra. All I was pointing was the taxpayer’s need to account for the income taxes due on his 401(k) income upon distribution.

      Am I as clear as mud? :)

    15. Joe Zekas May 29th, 2007 8:39 pm

      What a wacky analysis. Is anyone buying this?

      It ignores (yes, ignores) the difference between investing before and after-tax dollars, and completely leaves the employer match out of the equation.

      $500 a month into a 401k often yields a $250 employer match – $750 to invest each month versus, say, $350 after-tax. Run out the math over whatever long term you choose and the 401k comes out ahead, even after taking taxes on withdrawals into account.

    16. Michael Wurzer May 29th, 2007 8:57 pm

      Here’s my question: I thought this blogging thing was about transparency? I thought it wasn’t about being as clear as mud? I don’t think someone should come out and categorically say “First, immediately stop contributing to your 401(k) — it’s a scam” without defining very explicitly the circumstances under which that advice is valid. Unless, of course, you’re just trying to sell something. Unless, of course, this really isn’t about transparency at all but is really about old-school hide-the-ball sales tactics. I’m not an investment advisor and I don’t play one on tv or in the RE.net. But I do run a company with lots of people investing in a 401K plan and this stuff does matter. If a 401K plan is a scam in every circumstance, please be more clear. Do the math for both cases and explain it. If you just want people to call you, then just say that. But don’t lob grenades without caring where they land.

    17. Jeff Brown May 30th, 2007 9:33 am

      Michael – Joe,

      I’ll be back to both of you. I’m feeling a little under the weather. Your comments will be addressed in detail when I’m seeing one of everything.

    18. Brian Brady May 30th, 2007 3:09 pm

      Ahh, Jeff. I’m out-of-town and can’t lend a hand. Joe Zekas jumps in (a great voice from the past).

      JOE SAYS:”leaves the employer match out of the equation”
      That can’t be ignored, Joe. If there is an employer-match, it can change the rules. Most small to mid-sized companies, however, don’t match contributions. The strategy should themn be to contribute up to the matched amount.

      MICHAEL SAYS: ” But I do run a company with lots of people investing in a 401K plan and this stuff does matter”

      If you’re matcjing the contribution, the statement Jeff makes doesn’t work. Otherwise, it makes more sense to pay people the after-tax dollars and let them invest it into a tax-advantages investment so that they can draw upon it tax-free.

      Michael and Joe, if he shows it to you in plain black and white numbers, will you evangelize with the same vigor you’ve criticized?

    19. Michael Wurzer May 30th, 2007 3:34 pm

      Jeff, first, I apologize for personalizing my comments. I should take my own advice and not launch grenades.

      Back to the issues, I’ve put together a couple of calculators using a neat tool from instacalc.com. Here’s a calculator showing the performance of $1,000 invested monthly into a 401K (tax-free in, taxed out) and here’s a calculator showing the same amount invested after-taxes in a tax-free vehicle. As set up, the calculators assume the same tax rate (32%) and interest rate (8%), and the 401K includes an employer match of 50%. As Brian and Joe pointed out, with these assumptions, the 401K comes out well ahead. If you eliminate the employer match, the two result in the exact same return. Of course, the tax rate assumptions could change going forward, for better or worse, but that’s true for either investment vehicle. Where you are right is that, without an employer match, a young person who is earning less now than what they expect to earn in retirement may now be in a lower tax bracket now than they will be in retirement, and so will be better off with using after-tax dollars invested into a tax-free shelter. Which leads me to the big question left by Brian and the source of my earlier consternation — please do tell more details about this tax-free investment grade insurance. I would love to learn more about that, as I’m sure would others.

    20. Eric May 30th, 2007 3:47 pm

      Passed this article onto an associate who dabbles with various investments, and he didn’t seem too fond of this. Here were his bullet points. Is he off?

      This “investment grade insurance” is just another name for Variable Universal Life or VUL, which already has a horrible reputation with anyone who knows anything about money and investing. Rather than rehash all the cons of VUL, I’ll go over the quick bulletpoints:

      -You will not make the full market return. He uses 8% as an example, but in reality if the market went up 8% every year, you’d only make perhaps 6%. That’s because these products have a “participation rate” that says you earn XX% of the S&P or some other index’s return. That’s worse than a mutual fund with a 2% expense ratio… highway robbery!

      -On top of that, in exchange for a guarantee of not “losing” money (extremely unlikely over the long term in a stock investment anyway), you agree to be capped at some particular per-year gain. Usually its about 10-12%. So the market has a banner year and returns 25%, guess what you make… only 10%.

      -Your “surrender value” may be significantly less than it would be in the first few years of the plan if you ever want/need to cash out. Most of your initial premium payments are going towards the salesman’s commission and administrative costs, and profits for the company. At least with a 401(k), you can pay the taxes and 10% penalty. Penalties for breaking a VUL are usually much larger.

    21. Brian Brady May 31st, 2007 6:44 am

      “Passed this article onto an associate who dabbles with various investments, and he didn’t seem too fond of this”

      He’s not going to be fond of it, Eric. Nobody is happy when they find out that Santa Claus isn’t real.

      Two more questions to ponder:

      1- If something you believed for the better part of your life turns out to be untrue, when would you like to find out the truth?

      2- Will you keep an open mind?

      This “truth” left me, a serial contributor to qualified plans, depressed when I ran the numbers. I realized that the gov’t would be confiscated as much half my money in retirement…OUCH!

    22. Chuchundra May 31st, 2007 7:52 am

      The problems with “investment grade insurance” or VUL are aptly covered in this article

      As covered in the above comment, some issues with VUL include extremely high fees and commissions as well as the cost of insurance portion itself.

      That insurance portion can be a real kicker late in your retirement as costs for it rise with your age. Think about how much you’ll be shelling out for life insurance if you’re lucky enough to live into you 70′s and beyond. What do you think the life insurance premium is for a 75 or 80 year old man?

      You’ll have to keep paying those premiums until the day you die. Why? Because, if the policy lapses, all of that “tax-free income”, which is actually a loan taken against policy, suddenly becomes taxable income and you’ll owe taxes on every dollar of earnings you’ve withdrawn.

      If you’re worried about taxes in your retirement, I’d suggest a Roth IRA. Roths are good for people who are in a lower bracket now than they expect to be in during their retirement. You get a better return, more flexibility with your money and tax benefits for retirement.

      Using an insurance policy as an investment vehicle is a great way to make money…for the guy selling the insurance. For the rest of us, not so much.

    23. Michael Wurzer May 31st, 2007 8:12 am

      Brian, though I know there are a lot of people who do not understand investing very well, I find it hard to feel sorry for anyone who didn’t understand that 401K withdrawals are taxable. The only reason this is seen as some sort of shocking news is in contrast with undocumented investments that purportedly throw off “an annual income of roughly $100,000 a year — for life — tax free.” As you said earlier, let’s talk about this in “black and white” with detailed facts and formulas and not broad unsubstantiated claims. If readers of BHB are going to be enlightened by news that 401K withdrawals are taxable, then they most definitely also need more than just broad claims if they are going to take anything of value away from this discussion.

    24. Brian Brady May 31st, 2007 8:46 am

      Point of disclosure: I am not a purveyor of insurance products and I don’t believe Jeff is either.

      I’m sure that this post will be the “tipping point” to the way a generation thinks about money and investing.

    25. Guru May 31st, 2007 8:55 am

      Contributions to a 401K are pre-tax (gross pay) and you will earn a return on that “gross” amount that is invested. Purchase variable life insurance with “after tax” money and you have lost to taxes, depending on your tax bracket, 30%,40% or more up front. You can’t compare a $500 investment in a 401K to a $500 premium to buy into a variable life insurance product. You had to earn $700 before tax to have $500 after tax to pay the premium (assuming a 30% tax rate). A better move is to invest in a 401K or a Roth IRA and buy a good index fund (such as Vanguard S&P 500 fund) with a low expense ratio (approx. 0.20%).

    26. John Kalinowski May 31st, 2007 12:07 pm

      This has been an intriguing discussion, but my “it’s too good to be true” sensors were definitely activated. I found an interesting article that does an excellent job of discussing the potential pitfalls:

      http://invest-faq.com/articles/ins-vul.html

      It definitely doesn’t sound like the perfect solution that Jeff makes it out to be, and if you read the above article, you’ll see that you have to be very careful or you could get yourself into an ugly tax situation.

      I’d love to hear from others with more knowledge on the subject, perhaps even Jeff’s financial guy? Jeff- can you get him to post his explanation, and perhaps comment on the above article?

    27. Jeff Brown May 31st, 2007 2:02 pm

      Guys – I”m not dying, but under the weather a bit. I’ll return ASAP. Thanks for your patience.

    28. Chuchundra May 31st, 2007 3:28 pm

      I hope you feel better, Jeff.

      Although, on the bright side, if you do succumb, at least you have plenty of life insurance. ;)

    29. Jeff Brown May 31st, 2007 3:34 pm

      Sure, make me laugh. :) Thanks Chuchundra, I should be back by Monday. My next post may possibly turn out to be my most satisfying.

      Enjoy your weekend.

    30. [...] First, by claiming that 401k plans are “a scam”, Jeff Brown over at the Bloodhound has distracted me into researching equity indexed universal life (EIUL) insurance.  I’ve learned more about EIUL over the last few days than necessary, that’s for sure.  My wife has asked me many times why I’m researching life insurance, thinking maybe I was doing it for her mom whose husband just passed away, and I sheepishly had to say, “no, it’s about the blog.”  (She shrugs and walks away, an all too common response due to my fixation.) [...]

    31. Jim Collins October 10th, 2007 3:02 am

      “Jeff, would your advice to avoid 401k investments be the same if the 401k plan includes a company match to the employee’s contributions?” Q from Michael Wurzer

      Response: Where is the money being invested is as equally important question. 100% matching and buying the company stock with your own money and then matching money and then the company goes bankrupt or is heavily decreased in value in one way or another could eat up all the match and some. It’s the people that are investing the money where do they have it invested is the overall key question then the match comes into play. If the person can invest wisely and then get a company match the 401k is a vechile that can be very powerful. However the income tax rate when the money is accessed could be a very important question to ask as well. It is very conforting knowing the tax that I am being taxed at then not knowing what I will be taxed at in the future. Especially with the amount of debt our country has currently with no end in site. Having the people in goverment decide my tax rate in the future is a scary thing.

      “A tax-exempt 8% return from Investment Grade Insurance?”

      I use the tax savings on interest write offs on the mortgage on my home to invest into the VUL policy.

      I myself own a varible universal life policy and the returns have been around 15% avaerage rate of return over the past 5 1/2 years. For 3 1/2 years the money was invested in real estate funds. And the last two years in international funds.

      The interest that I earn on the money in the varible universal life policy is loaned out to qualified borrowers. I charge a 15% interest rate plus the a small wire transfer fee. And with the payments back into the policy on a monthly basis I reinvest back into the international fund. So my varible policy is working similar to a bank.

      THE BUDDY THAT DABBLES IN INVESTMENTS

      (I would suggest gathering his licesning information before taking advice. Also backgrounds such as college in the financial industry as well astalking to references that he has helped out with in the past. as well as looking over this BUDDY’s investment plan that he has for himself. investment advice is a serious issue and I would hope you would do the previous.)

      This “investment grade insurance” is just another name for Variable Universal Life or VUL, which already has a horrible reputation with anyone who knows anything about money and investing. Rather than rehash all the cons of VUL, I’ll go over the quick bulletpoints:

      -You will not make the full market return. He uses 8% as an example, but in reality if the market went up 8% every year, you’d only make perhaps 6%. That’s because these products have a “participation rate” that says you earn XX% of the S&P or some other index’s return. That’s worse than a mutual fund with a 2% expense ratio… highway robbery!

      WRONG (You are discussing the EIUL or equity indexed universal life which is indexed based. Which you partake in a percentage of the index. VUL is not indexed based it has a sub account that is placed in a mutual fund with 100% participation rate.)

      -On top of that, in exchange for a guarantee of not “losing” money (extremely unlikely over the long term in a stock investment anyway), you agree to be capped at some particular per-year gain. Usually its about 10-12%. So the market has a banner year and returns 25%, guess what you make… only 10%.

      WRONG again you are describing a EIUL an equity indexed universal life not a varible universal life.

      -Your “surrender value” may be significantly less than it would be in the first few years of the plan if you ever want/need to cash out. Most of your initial premium payments are going towards the salesman’s commission and administrative costs, and profits for the company. At least with a 401(k), you can pay the taxes and 10% penalty. Penalties for breaking a VUL are usually much larger.

      (There is something wrong very wrong in your financial plan if you are having to access your 401k money in a couple of years from starting investment. You need to establish an emergency fund as well as a long term investment plan. In insurance you can access the cash value so you wouldnt need to cancel the policy. The surrender charge is when you cancel the policy that is what you walk away with. In a 401k you can loan yourself the money or cancel the policy if you need cash. Some companies allow you to loan yourself the money and some dont. Your company matches will stop while there is an outstanding loan as well. And if you were to leave the company your loan becomes immediatly payable.)

      Contributions to a 401K are pre-tax (gross pay) and you will earn a return on that “gross” amount that is invested. Purchase variable life insurance with “after tax” money and you have lost to taxes, depending on your tax bracket, 30%,40% or more up front. You can’t compare a $500 investment in a 401K to a $500 premium to buy into a variable life insurance product. You had to earn $700 before tax to have $500 after tax to pay the premium (assuming a 30% tax rate). A better move is to invest in a 401K or a Roth IRA and buy a good index fund (such as Vanguard S&P 500 fund) with a low expense ratio (approx. 0.20%).

      I borrowed the money that was placed into my VUL from my mortgage at a 5% interest rate. And was given a tax write off for the money borrowed. So my net after tax write offs for borrowered money and investment return and loaned money from policys cash value and the investment return off that is a lot more then getting the pre tax dollars into a taxdeffered low rate of return and taxed at an unknown rate at the end 401k. Roth IRA is not a bad idea however I would not be able to arbitrage the money interanlly in the ROTH IRA because I can not access the money with out tax hits)

      Sorry for the typos and grammical erros I did not re read my text.

      Thank you.

    32. Brian Brady October 10th, 2007 3:29 pm

      Jim:

      I disagree with your thoughts about indexed investments returns.

      1- a 401-k can never equal the indexed return because of expense ratios; the 401-k invests in a mutual fund which attempts to mirror the return,

      2- An indexed life insurance contract can equal the return of the index. Do you know why?

    33. Jim Collins October 11th, 2007 2:24 am

      Brian,

      Not sure where this will be going maybe you will educate me further however here is my reponse to your question.

      On indexed life insurance contract the money is not invested in a mutual fund so no expenses are taken out like in a traditional s&p indexed mutual fund.

      The insurance company looks at the s&p 500 growth and credits the account accordingly at the end of a segment period with 100% participation rate of the index.

      So technically you can earn a lower rate of return on an indexed universal life and still out pace a varible universal lifes rate of return because expense ratios in a varbible universal life sub-account mutual funds take away from the gains.

      As well as the equity indexed universal life has a minimum gurantee so during negative years of s&p 500 growth you still have a minimum floor. In a varible universal life you dont have these gurantees.

      I guess it comes down to the age old question are you concerned with fees or net returns after fees?

      Jim.

    34. [...] Several days ago I wrote a piece talking about qualified plans, better known as IRA’s and 401(k)’s. It was titled 401(k)’s IRA’s & Urban Myths, and discussed some of the false beliefs many people have on the subject. It also brought an alternative to the table — investment grade insurance. [...]