Why an insurance contract plan is more tax-efficient than a 401(k)Blog added by Nicholas Paleveda MBA J.D. LL.M on November 6, 2013
Nick Paleveda MBA J.D. LL.M

Nicholas Paleveda MBA J.D. LL.M

Sanford, NC

Joined: March 27, 2012

In 1921, MetLife introduced a group annuity contract that was used to fund pension plans. In 1974, this type of plan was codified as an ERISA plan and exempt from the minimum funding standard. The insurance contract plan allows a plan sponsor to purchase annuity contracts and life insurance contracts that are deductible from federal and state income tax, as well as Social Security and Medicare taxes. The insurance contract plan is a pension plan that grows tax-deferred and will pay benefits as a lump sum or lifetime income at retirement.

But why is a life insurance contract plan more tax-efficient then a 401k?

Follow the money: 401(k) plans are not tax-efficient

In a 401(k), funds go from the company to the employee as salary. First, 15.3 percent is taken out for Social Security and Medicare taxes, and then the funds go into the plan. In an insurance contract plan, the funds go from the company directly to the plan. No Social Security tax, no Medicare tax, which means no 15.3 percent load. No kidding.

See also:
Tax-advantaged income with life insurance and Social Security
Tax-deductible life insurance?
Does a 401(k) still make sense?
The hidden cost of a 401(k) plan
Is it time to reconsider the 401(k)?
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