401K vs IRA vs IUL
The Complete Retirement Account Comparison
Most Americans only know about 401(k)s and IRAs. But there's a third category—Section 7702 compliant life insurance (like IUL)—that offers unique tax advantages. Let's compare all of them.
All Retirement Account Types Compared
The Quick Reference Matrix
| Feature | Traditional 401K | Roth 401K | Roth IRA | IUL (Section 7702) |
|---|---|---|---|---|
| Tax on Contributions | Pre-tax | After-tax | After-tax | After-tax |
| Tax on Growth | Deferred | Tax-free | Tax-free | Tax-free |
| Tax on Withdrawal | Ordinary income | Tax-free | Tax-free | Tax-free (loans) |
| 2024 Contribution Limit | $23,000 | $23,000 | $7,000 | Unlimited* |
| Employer Match | Yes | Yes | No | No |
| Income Limits | No | No | $161K/$240K | None |
| RMDs | Yes (age 73) | No | No | No |
| Early Access Penalty | 10% before 59½ | 10% before 59½ | On earnings | None (loans) |
| Death Benefit | Balance only | Balance only | Balance only | Multiplied |
*IUL contributions limited by death benefit and MEC rules, but no statutory cap.
Tax Treatment Deep Dive
Tax-DEFERRED (Traditional 401K & IRA)
- 1.Contribute pre-tax dollars → reduce taxable income today
- 2.Money grows tax-deferred → no annual taxes on gains
- 3.Withdraw in retirement → pay ordinary income tax on EVERYTHING
Example: $500,000 401K at retirement
Your contributions: $200,000
Growth: $300,000
Taxes at 25%: -$125,000
Net to you: $375,000
Tax-FREE (Roth 401K, Roth IRA, IUL)
- 1.Contribute after-tax dollars → no deduction today
- 2.Money grows tax-free → no annual taxes on gains
- 3.Access tax-free → qualified withdrawals (Roth) or loans (IUL)
Example: $500,000 Roth or IUL at retirement
Your contributions: $200,000
Growth: $300,000
Taxes: $0
Net to you: $500,000
Difference: $125,000 more in your pocket.
25-Year Contribution Potential
Contribution Limits Comparison
The limits you can contribute matter significantly over time. IUL has no statutory cap— only limited by your death benefit structure.
| Account | Max Annual | 25-Year Total | At 7% Growth |
|---|---|---|---|
| 401K | $23,000 | $575,000 | $1,580,000 |
| Roth IRA | $7,000 | $175,000 | $475,000 |
| Combined 401K + Roth | $30,000 | $750,000 | $2,055,000 |
| IUL ($50K/year) | $50,000 | $1,250,000 | $3,200,000 |
Forced Withdrawals You Can't Control
Required Minimum Distributions
Starting at age 73, you MUST withdraw a percentage from Traditional 401K & IRA:
| Age | RMD Percentage | On $1,000,000 |
|---|---|---|
| 73 | 3.77% | $37,700 |
| 75 | 4.07% | $40,700 |
| 80 | 5.35% | $53,500 |
| 85 | 6.76% | $67,600 |
| 90 | 8.77% | $87,700 |
Problems with RMDs:
- • Taxable income whether you need it or not
- • Can push you into higher tax brackets
- • Triggers Social Security taxation
- • Increases Medicare premiums (IRMAA)
Roth IRA & IUL: No RMDs. You control when you access your money.
Why You Need Multiple Tax Buckets
The Tax Diversification Strategy
Tax-Deferred
401K, Traditional IRA
Taxed at withdrawal
Tax-Free
Roth IRA, Roth 401K, IUL
Never taxed
Taxable
Brokerage
Taxed annually + at sale
Why Tax Diversification Matters
Nobody knows future tax rates. With $34 trillion in debt and entitlement funding challenges, tax rates could rise significantly. Having money in different tax buckets gives you flexibility—pull from tax-free when rates are high, tax-deferred when rates are low.
Optimal Strategy by Income Level
Under $100K Income
- 1.401K up to employer match (free money)
- 2.Roth IRA (if under income limit)
- 3.Max 401K (Roth if available)
- 4.Taxable brokerage for additional savings
$100K - $200K Income
- 1.401K up to employer match
- 2.Roth IRA (if under income limit)
- 3.Consider Roth 401K vs Traditional
- 4.Begin exploring IUL for tax diversification
$200K - $400K Income
- 1.401K up to employer match
- 2.Backdoor Roth IRA ($7K)
- 3.Mega Backdoor Roth (if plan allows)
- 4.IUL for significant tax-free capacity
$400K+ Income
- 1.401K up to employer match (diminishing value)
- 2.IUL as primary tax-free vehicle
- 3.Taxable brokerage for liquidity
- 4.Consider reducing 401K beyond match
Matt Nye's Recommendation
20+ Years in Financial Services
1. Get the 401K match. Period. It's 50-100% instant return.
2. Fund a Roth IRA if you qualify. Simple, cheap, tax-free. Do it.
3. DON'T automatically max your 401K beyond the match. You're filling a tax bucket that will be emptied later at unknown rates.
4. For high earners ($200K+), use IUL for serious tax-free capacity. It's the only vehicle without income limits OR contribution caps.
"The question isn't 'which is best?' It's 'what's the right mix for MY situation?'"
Frequently Asked Questions
Get Your Personalized Account Mix
The optimal mix depends on your specific situation. Let's analyze your current accounts, income, tax bracket, and goals to determine the best strategy for YOU.