The 401(k) and the Max Funded IUL are 2 popular retirement investment programs in the U.S. However, few people truly understand the advantages and disadvantages of each, leading to unnecessary mistakes when choosing where to entrust their savings. In this article, Thinksmart Insurance will compare the 401(k) and Max Funded IUL to help you decide which retirement program is best for you. Don’t miss out!
Comparison of the 401(k) and Max Funded IUL
In previous articles, Thinksmart Insurance has clarified the concepts, pros and cons, participation costs, and policies of these two retirement programs: the 401(k) and the Max Funded IUL. You can read more through the articles below:
In this article, Thinksmart Insurance will focus solely on comparing and delving into the differences between the 401(k) and Max Funded IUL, providing practical advice for investing in your retirement. The comparison factors include:
Eligible Participants
Regarding eligible participants, the 401(k) plan has more limitations compared to a Max Funded IUL:
- 401(k) Plan: Only available to individuals working for companies or businesses. The approval process mainly requires having a job and sufficient financial capability.
- Max Funded IUL: Anyone can participate, as long as they meet the requirements for both financial capability and health.
Annual Contributions
When comparing the 401(k) with Max Funded IUL, we must compare the annual contributions between these two retirement investment accounts. Specifically:
- 401(k) Plan: In 2024, the maximum contribution to a 401(k) is $23,000, and $30,500 for those aged 50 and older (according to the “catch-up” contribution rule).
- Max Funded IUL: There is no limit to the amount you can contribute to a Max Funded IUL account. The more you contribute, the larger the amount you will receive during retirement.
However, compared to Max Funded IUL, the 401(k) has an advantage in that the company you work for will also contribute to your account, usually adding 3% to 5% of your salary (similar to social insurance policies in Vietnam). On the other hand, with Max Funded IUL, the contributions are entirely your own money.
Profitability
In terms of investment methods, the 401(k) Plan mainly earns profits through investments in stocks and bonds. Meanwhile, Max Funded IUL relies on stock market indices (such as the S&P 500). Therefore, the profits from Max Funded IUL are higher, less volatile, and pose less risk than those from a 401(k).
Specifically, the average rates of return for the 401(k) and Max Funded IUL are as follows:
- 401(k) Plan: While there is no limit to the growth amount, the average return usually ranges from 5% to 8% per year, based on selected stock funds, bonds, or mutual funds. The risk entirely depends on the market (meaning if investments perform poorly, your accumulated amount will decrease).
- Max Funded IUL: The average return rate typically ranges from 8% to 12.5% per year, depending on market indices such as the S&P 500.
Max Funded IUL Quote Table for Age 50 (Reference)
Moreover, Max Funded IUL has an “Index Lock“ policy, giving it a completely superior profit compared to the 401(k). With this policy, you can choose a profit rate (a percentage growth rate of the market index) to apply to the interest rate for an entire year, thereby ensuring stable growth regardless of market declines.
Safety and Risk Level
As mentioned above, thanks to its anti-decline policy, investing in a Max Funded IUL is safer than a 401(k). Specifically:
- 401(k) Plan: The more successful the investments in stocks, bonds, and mutual funds, the greater the profits. But if there are losses, your funds will decrease accordingly.
- Max Funded IUL: It has an anti-decline policy, ensuring NO LOSS even if the market turns negative.
Contribution Period
The contribution periods of the 401(k) and Max Funded IUL also vary significantly:
- 401(k) Plan: Depending on the desired amount to be received, the monthly contribution amount determines the contract period (i.e., the number of years needed to contribute). Typically, the contribution period for the 401(k) is about 20 to 40 years.
- Max Funded IUL: Contributions are made only in the first 5 years. From the 6th year, you break even, and the amount in the account grows continuously every year. For instance, if you participate in a Max Funded IUL at age 41 with a contribution of $30,000 per year, you can withdraw $50,968 annually tax-free from age 65 to 85 (not counting the remaining amount for death benefits).
Max Funded IUL Quote Table for Age 40 (Reference)
If you choose Max Funded IUL over 401(k) for retirement accumulation, you should join as early as possible. Because with the same contribution of $30,000 per year, and only for 5 years, the difference in the amount you receive from age 65 can be significant. Specifically:
Participation Age (Contribution: $30,000/year for 5 years) | Amount Received from Age 65 to 85 |
30 years old | $105,569 |
35 years old | $73,617 |
40 years old | $50,968 |
| 41 years old | $34,868 |
| 50 years old | $23,932 |
However, the contribution to a Max Funded IUL in the first 5 years can be a burden if you do not have a ready and specific financial plan.
Tax-Free Capability
Both the 401(k) and Max Funded IUL have tax-free policies. However, there are some differences:
- 401(k) Plan: You are only exempt from taxes when withdrawing money after age 59.5. If you withdraw before this age, you will have to pay personal income tax on the total amount withdrawn.
- Max Funded IUL: Profits from investments within the IUL contract are not taxed, and loans from the cash value are not taxed if the contract is managed properly.
Management, Investment, and Insurance Costs
The management fees for a 401(k) are usually lower compared to a Max Funded IUL, but the investment options might be limited. A-Max Funded IUL has high insurance premiums and complex management fees, but the benefits from tax-free growth and asset protection can somewhat offset these costs:
- 401(k) Plan: Management fees typically range from 0.5% to 2% per year, depending on the funds chosen for investment.
- Max Funded IUL: Insurance premiums and related fees can range from 2% to 4% per year, including investment management fees, insurance fees, and other contract-related charges.
Early Withdrawal and Loan Options
- 401(k) Plan: If you borrow from a 401(k), you must repay both the loan and interest within 5 years, or you will face penalties. Additionally, withdrawing before the age of 59.5 incurs a 10% penalty plus income taxes.
- Max Funded IUL: The policyholder can borrow against the cash value without tax penalties, but will have to pay loan interest and other related fees.
Participant Protection Policies
In terms of user protection policies, Max Funded IUL surpasses the 401(k) by incorporating life insurance benefits, an advantage that current 401(k) Plans do not offer. Specifically, Max Funded IUL participants receive:
- Financial compensation in case of illness or accident.
- Compensation if unable to work, perform daily activities, or in the event of death.
- Protection up to the age of 120.
- Financial security for the family in the event of an unexpected accident.
Summary Comparison Table of 401(k) and Max Funded IUL
Comparison Factors | 401(k) Plan | Max Funded IUL |
| Annual Contribution Limit | Up to $23,000 (2024), $30,500 if over 50 years old. | No limit |
| Employer Contribution | Depends on company policy, typically 3% – 5% of salary. | None |
| Tax Benefits | Tax-free | Tax-free |
| Management Fees | About 0.5% – 2% per year. | Insurance and management fees can reach 2% – 4% per year. |
| Average Rate of Return | 5% – 8% per year, depending on the chosen investment fund. | 8% – 12.5% per year, depending on the investment index and contract conditions. |
| Contribution Period | Long-term can be several decades (depending on the desired retirement amount). | 5 years |
| Investment Risk | Unlimited returns, depending on the financial market (you incur losses if the market performs poorly). | Limited returns but guaranteed NO LOSS even if the market declines. |
| Early Withdrawal Fees | 10% if withdrawn before the age of 59.5, plus income tax. | No fees if borrowed against cash value, but loan and contract fees may apply. |
| Asset Protection | No additional asset protection policy. | Life insurance policy included. |
Should You Choose a 401(k) or a Max Funded IUL?
When to Choose a 401(k)?
A 401(k) is suitable for those with low to moderate income who want to benefit from employer contributions (especially those working for a company) and short-term tax advantages. It’s an appropriate option if you prefer lower management fees and do not need additional asset protection from life insurance.
Benefits of Choosing a 401(k):
- Tax-free withdrawals after the age of 59.5.
- Employer matching contributions.
- Diverse investment options with reasonable management fees.
- Stable annual contributions.
When to Choose a Max Funded IUL?
Max Funded IUL is ideal for individuals with moderate to high income, seeking a long-term investment solution with super high interest rates, flexibility, asset protection, family security against unforeseen risks, and tax-free benefits. If you want a flexible financial plan that can adapt to your personal needs, Max Funded IUL is a considerable option.
Benefits of Choosing a Max Funded IUL:
- Super high returns—up to 12.5% annually.
- Tax-free, maximizing returns.
- Flexible adjustments for insurance premiums and investments.
- Only requires 5 years of contributions.
- Guaranteed no losses.
- Asset protection against health and financial risks through an accompanying life insurance policy.
Conclusion
Depending on your financial goals and risk tolerance, you can choose between a 401(k) and a Max Funded IUL. If you prioritize immediate tax benefits and employer contributions, a 401(k) is the right choice. On the other hand, if you seek asset and family protection along with a long-term, tax-free investment strategy, a Max Funded IUL might be the better option.
Above, Thinksmart Insurance has compared 401(k) and Max Funded IUL across 9 specific criteria. If you have any questions or want to learn more about Max Funded IUL and life insurance programs, call the hotline at (678) 722 3447, message via Messenger, or leave a note at Support@Thinksmartinsurance.com.
