9

Would it ever make sense to take a lower salary in order to contribute fully to a Roth IRA?

This is probably very circumstantial, so let's assume:

  • I'm not in debt and have no other obligations (family, etc)
  • I don't really need the additional money in the short term
  • I'm able to contribute the legal Roth limit regardless of the salary I take
  • I'm fairly young (30+ years from retirement)
  • I'm filing singly (so if I understand correctly, the cut-off for full contribution to my Roth is $114,000 for 2014)

My reasoning is that I don't need the additional salary income anyway, so if I can take a lower salary, I'd be able to contribute more Roth more for now. Also, I might be able to negotiate and give up salary for non-salary compensation / benefits.

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  • You can offer/inquire about taking a sufficient unpaid leave of absence periodically to engineer your salary total within the boundaries – user662852 Sep 7 '15 at 12:09
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    Am I missing something? Can you contribute more than $5,500/year combined on all IRA's? By adding I'm able to contribute the legal Roth limit regardless of the salary I take you make this a null and void question. – Ross Sep 8 '15 at 20:51
14

No. Even if you don't need the additional salary income now, you might be able to contribute the incremental amount over the Roth max to either of the other two types of IRAs, or maybe even something else. You never want to take a lower salary, especially not in exchange for something that is conditional e.g. benefits. Your salary is the only thing that is guaranteed as a condition of employment. Other things can be changed by the employer at a future point in time.

If you have two different job offers and the salaries are different, that is a separate scenario. You should make the decision based on overall comparison, not just using Roth limit contribution criteria.

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13

Why not just deposit to a Traditional IRA, and convert it to Roth?

If you have pretax IRA money, you need to pay prorated tax (on what wasn't yet taxed) but that's it. It rarely makes sense to ask for a lower wage. Does your company offer a 401(k) account?

To clarify, the existing Traditional IRA balance is the problem. The issue arises when you have a new deposit that otherwise isn't deductible and try to convert it. Absent that existing IRA, the immediate conversion is tax free. Now, with that IRA in place the conversion prorates some of that pretax money, and you are subject to a tax bill.

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  • Good point, I didn't think of that. Does this mean you can essentially always indirectly contribute to a Roth regardless of income? – Sherwin Yu Apr 4 '14 at 19:53
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    Yes. It's commonly called a "Back Door" Roth, and ever since the income limit on converting was removed, it's a great tool. – JTP - Apologise to Monica♦ Apr 4 '14 at 21:31
  • Out of curiosity, suppose you did have a bunch of pre-tax money in a traditional IRA, making the loophole ineffective. Is it possible (depending on time to retirement, expected gains, and marginal tax rate) that you'd come out ahead by taking a lower salary and contributing directly to a Roth? – Daniel Lubarov Jun 19 '14 at 0:03

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