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Would it be in my interest (assuming my employer agrees) to reduce my salary by x amount in exchange for an increase in employer 401k contribution for x amount?

For example if I make $150,000/yr and receive up to $5,000 in matching, would it be in my interest for my employer to instead give me $120,000 in salary and an extra $30,000 in 401k contribution?

I know employers can contribute up to around $40,000. And that money is money I'd put in index funds in a normal brokerage account anyway.

Would it serve me better in the 401k, just in terms of growth?

I'm not talking about the trade-offs of having the money available or not available for sale or withdrawal, just the growth side.

My employer may be willing to do this, just not totally sure it's best.

Thoughts?

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  • I know this will be a controversial comment, but there is such a thing as putting too much money towards a 401(k). Big 401(k) balances mean big withdrawals during retirement. Big withdrawals during retirement, mean higher taxes. Worst case scenario, you might end up saving 24% in taxes today, but paying 37% later. It is best to diversify among traditional contributions, roth contributions, and non-retirement investments subject to the lower long-term capital gains tax rate. This gives you room to strategize your withdrawals based on what your circumstances are in the future. Jan 4 at 16:50
  • Deferring income to a retirement account delays the taxing of that income, which may or may not be a positive thing. This may also affect qualifying for things like loans, college financial aid, etc. which are dependent on income and treat retirement savings specially from other assets.
    – spuck
    Jan 4 at 17:09
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First some numbers from the IRS:

Defined Contribution Limits 61,000 for 2022 58,000 for 2021
Catch-up Contributions 6,500 for 2022 6,500 for 2021

that limit covers:

An overall limit on contributions to a participant’s account. The limit applies to the total of:

  • elective deferrals (but not catch-up contributions)
  • employer matching contributions
  • employer nonelective contributions
  • allocations of forfeitures

That means that in 2022 including the $6,500 catch-up is $67.500 if you are 50 or older.

The first issue you will run into is convincing the company that they should do this just for you. Companies don't like to do special requests.

Another issue will be that even if they do this for you, and other people making your salary of higher, they risk that the participation amounts for the people that make the most will dwarf the rest of the contributions and they will fail the 401(k) discrimination tests. That is a issue they and their employees don't want to happen.

You could see if you can contribute money post-tax. That is different than the Roth 401(k). It doesn't save you anything on taxes this year, but it does grow tax deferred. Some companies will even allow you to convert the post-tax money into a Roth 401(k).

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If all you're looking for is a way to move more of your income into a 401(k), you might be better served by doing a mega backdoor Roth conversion.

The expanded contribution limits aren't just for your employer match - they also include your own post-tax contributions (if your employer's plan allows them). Normally, these contributions wouldn't be tax-advantaged like traditional or Roth contributions; you would pay taxes on both the income and the earnings. But you can do a backdoor conversion to transfer them to a Roth 401(k) (again, if your plan allows it) or to a Roth IRA. That way, your earnings will grow tax-free.

If your current 401(k) plan allows post-tax contributions and in-plan conversions, you're all set. If not, your employer would likely be more amenable to making these pretty common plan changes than to offering you special treatment with an extra match. Plus, this offers you the flexibility to contribute as much or as little as you want year to year without having to renegotiate.

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