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I am currently able to contribute the maximum employee contribution of $18,000 to my 401k and receive an employer match of $9,000 for a total contribution of $27,000. However, it is my understanding that the maximum total contribution is $53,000, which I could reach if my employer were to contribute an additional $26,000.

Assuming I have the disposable income, would it be worth it to ask my employer to pay me $26,000 less per year in salary and instead contribute an additional $26,000 to my 401k? This would significantly reduce my tax burden but obviously make those funds inaccessible to me until retirement (I am only 24 so retirement is a long way off).

Most people would prefer to keep that cash on hand for an eventual home purchase. I could however use this method to quickly reach a 401k value of $100,000 and then take a loan against my 401k of the maximum $50,000 to help with the purchase of a home. So I would be able to pay for $50,000 of the home with essentially untaxed income, and the interest on that loan would go back into my 401k (albeit taxed twice, once when paid and again when withdrawn in retirement).

Has anybody considered this before?

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    You can negotiate a lower salary, and the company can offer a 30K match, but they have to offer that match schedule to all employees. Maybe you're the only one who would take full advantage, but maybe not. – user662852 Oct 28 '16 at 2:45
  • I see. So my employer would not agree to this because the other employees would also have to be given access to the additional match, without having negotiated reduced salaries? – Comptonburger Oct 28 '16 at 2:49
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    Also, if your 401k plan allows after-tax Traditional 401k contributions, you could make those contributions up to $53000 yourself directly -- as after-tax contributions. – user102008 Oct 28 '16 at 7:00
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    Please see this question and answers for the pitfalls of borrowing from a 401K.money.stackexchange.com/questions/7451/… Also many 401Ks cap how much money can be borrowed. – Pete B. Oct 28 '16 at 12:16
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    Are you sure that you can borrow against the employer match part of your 401(k)? I read a particular 401(k) plan's documents carefully about 10 years ago, and that plan allowed loans against the employee contributions and earnings thereupon but not against the employer match part of the employee account. Of course, your plan might be different. – Dilip Sarwate Oct 28 '16 at 23:18
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This will be difficult to achieve.

It can be done, but it's very rare to have an agreement where your employer is willing to max out your contribution limit unless you are a partner in the business or a family relation.

In this situation the extra employer money would probably come from a profit sharing contribution. If your employer increases your match, others are correct that your employer would have to increase the match for everyone. Not so with a profit sharing contribution. This is assuming 2 things though:

  1. Your employer is willing to do this for you.
  2. This works operationally with your 401(k) Plan.

Both of those are BIG if's, and I'd say 99% of the time it's not gonna happen for either of those two reasons. Your chances are better if you don't own >5% of the company, don't make over $120,000/year, and are related to you employer. Good luck!

  • Do you know - are employers not allowed to provide multiple 401k plans to choose from, or is it simply uncommon? Also curious, where did the $120,000/year number come from? – Comptonburger Oct 31 '16 at 2:52
  • Generally, no. It's not that they aren't allowed to, it's that the plans would be seen as one for testing purposes anyway. At the end of the day it comes down to ownership structure. Same ownership, same plan. The $120k comes from the Highly Compensated Employee definition. If you're not an HCE it'll be easier to make a profit sharing contribution for you. – Chris Oct 31 '16 at 11:29
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Assumptions made for this answer, they may not be true for anybody:

  • You can borrow from your 401K and the terms of the loan meet your needs.
  • You know and accept the risks that a loss of job may require you to count the unpaid loan balance as income.
  • Your boss can setup a special case to have you forgo 26K of salary, and make the same size company contribution to the 401K. And the IRS allows this and doesn't see it as a way to avoid taxes.

For the numbers part we will assume you are single and make 96,000 per year.

Before this plan you:

  • make $8,000 per month
  • the bank sees you can afford 28% of $8,000 or $2,240 a month for PITI
  • the bank will allow you to have 10% of $8,000 or $800 a month for all other debts and obligations.

during the accumulation part of this plan you:

  • you make $5,833.33 a month.
  • the bank sees you can afford 28% of $5,833 or $1,633 for PITI
  • the bank will allow you to have 10% of $5,833 or $583 a month for all other debts and obligations.
  • You have to determine how to invest the additional funds, you don't want to have short term losses delay your ability to get the loan you want, not aggressive enough will delay you getting to $100K balance.

post accumulation portion

  • you have to get your boss to return your salary back to your normal $8,000 per month, and terminate your special arrangement.
  • the bank sees you can afford 28% of $8,000 or $2,240 a month for PITI
  • the bank will allow you to have 10% of $8,000 or $800 a month for all other debts and obligations.

after you get the loans:

  • Some 401K plans allow you to continue to make contributions during loan payback but not all do.
  • If they don't allow you to make contributions during the payback period you will be missing the company match during the pay back.
  • The $50K loan at 3% and a 5 year payback has a monthly payment of $898 per month. This isn't considered a mortgage so it comes out of the other loan category.
  • The mortgage company will know that some of the down payment is a loan and may consider you a higher risk. Loss of job will accelerate the need to pay it back, or you will have a tax issue. You may have to sell the house early due to these issues.
  • The interest on the 401K loan isn't tax deductible.

Unknowns: how long you have to wait post accumulation to convince the bank you really do make $96,000 per year.

  • Thank you for the calculations. The PITI 28/36 rule generally frustrates me because I have no other debts/obligations, and I would rather invest in my housing to save on rent as I have low/negative expectations of returns on other investments. So you can see how this strategy would appeal to me. It is a bit contrived though, I will admit. I don't actually intend to try to pull it off, just thought it was interesting.. – Comptonburger Oct 31 '16 at 2:44

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