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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76384  
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 4:17 PM
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The "withdrawls" from the IUL account will most likely be taken as loans. ... and ... and ...

Yeah. I know there are fancy ways to withdraw month from an IUL. But in my mind, a fancy withdrawal is just a withdrawal. But fancy. First off, too complicated for me to get my head around.

One thing I've learned is that if some technique or strategy is complicated and has a lot of moving parts --- it means that I'm gonna lose a lot of money. ;-(

From what I have read and been told, with IULs it is easily possible to run afoul of some IRS rule and face a huge tax bill.

what about the taxes on the dividends that are being received from the S&P index? Lastly, your SMA strategy would regularly be incuring captial gains taxes that would lower its overall performance.

Correct. Accounting for that can be EXTREMELY complicated. And it all depends on each individual's specific tax situation.

My spreadsheet has a parameter for expense ratio for the S&P500. You could use that to approximate the losses due to taxes.

A lecturer once said something that has stuck in my brain for 40 years. "I'mm be happy if I have to pay $1,000,000 in income tax. Because that means I made $FOUR million."

Okay, here goes ... first time I've run this.
The S&P SMA strategy, $10,000 initial + $100/mo, 1975 to 2013.
Total deposit (basis): $55,600.

IUL with 0.70% fee --> final value $302,000

(Note: SPY E/R is 0.09%)
0.0% E/R --> final value $879,100.
1.0% E/R --> final value $683,600.
2.0% E/R --> final value $534,300.

B&H 0.10% E/R --> final value $1,112,000
LTCG = $1,056,000
20% tax = $211,200
Net after tax: $900,800

B&H 0.70% E/R --> final value $906,300

So the effect of LTCG tax is approximately the same as adding an additional 0.60% E/R.

That means for SMA strategy, after tax:
0.09% E/R + 0.60% slippage for taxes--> final value $738,600.
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