When it comes to retirement planning, there are a number of different choices. Two of the most commonly used are tax-deferred retirement plans - such as IRAs or 401(k)s - and cash-value life insurance.

A tax-deferred plan offers a tax deduction for contributions, and then the money grows tax-deferred. Cash-value life insurance can also be thrown into the mix as a potential retirement planning vehicle. There is no tax deduction for money contributed to a life policy, but if withdrawals are structured as loans, money can be taken out tax-free. With these options, it is helpful to compare them and see the advantages and disadvantages of each.

Option 1: Tax-deferred

Tax advisors often counsel clients to take full advantage of tax-deferred retirement plans, such as traditional IRAs, SEPs, Simples or 401(k)s. The advantages of these types of plans are:

* The client receives a tax deduction for contributions.

* The gains grow tax-deferred.

* It is possible that money will be taken out when the client is in a lower tax bracket.

* Funds have some protection from lawsuits and bankruptcy.

Let's consider a numerical example of a $15,000-a-year 401(k) contribution at work: Take a 40-year-old male client in good health, in the 35 percent tax bracket, who plans to retire at 65, and assume that he earns a return of 8 percent annually on his investments, and that the investments have a 1 percent sales charge and a 1 percent annual management fee.

The results?

* At age 65, he will have accumulated $992,785 in his retirement plan.

* If he invested his tax savings of $5,250 each year under the same assumptions, he would accumulate $347,475.

* The after-tax value of his $992,785 is only $776,560, since if he withdrew the money it would all be taxable.

* He is able to withdraw $140,662 a year in taxable income every year for six years.

* At the end of the sixth year, he will run out of money.

Option 2: Life Insurance

The life insurance strategy directs the contributions into a life insurance policy instead of a tax-deferred retirement plan.

For this example, we used all of the same assumptions about the client. For this particular insurance product, we used a variable universal life insurance policy from a highly rated carrier.

The results are as follows:

* The client would have an immediate tax-free death benefit of $783,333.

* At age 65, he would have accumulated $1,127,072.

* He could take tax-free withdrawals (as policy loans) of $140,662 every year for 20 years.

* At age 85, he would still have $1,091,409 in the policy, and a death benefit of $1,474,059.

Compared to the tax-deferred plan, the life insurance accumulates a higher cash value, has a larger death benefit, and results in higher retirement income. The life insurance can also be structured to be estate-tax-free by having it owned in an irrevocable trust. All this makes the life insurance strategy something to consider.

Disclaimer: All of the above strategies use a number of assumptions and illustrations. Past performance does not predict future results.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans and tax reduction strategies. Reach him at www.vebaplan.com or (516) 938-5007.

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