Pinny and Rikki Silver felt like they were living on a treadmill, running hard without getting ahead. They struggled to make ends meet on Pinny’s salary and some parental assistance while Rikki raised their three young children. It was exciting when Pinny finally got a major raise—until they realized that most of it would be washed away by the loss of tax credits and Medicaid insurance. It was really demoralizing that their hard work wasn’t yielding additional income.

What could they do to avoid forgoing the assistance they were currently getting, despite the raise?

Falling Through the Cracks

Modern governments, especially that of the generous United States of America, take responsibility for their poorest citizens, helping them with basic needs like food, shelter, and medical care. But efficiently assisting millions is difficult—some who don’t need assistance retain eligibility while many needy people fall through the cracks. The Silvers’ issue is a common one. As a poor family’s income grows, they can be losing money for working more or rising on the corporate ladder.

A Lose-Lose Situation

Many families like the Silvers would like to raise their incomes and become self-sufficient, but doing so requires overcoming a large gap in the social net. To cover their bills, they’d need a truly massive gain in salary to compensate for the loss of assistance. Sadly, many stay permanently boxed into their current income levels and a lifetime of poverty. Others are tempted to cheat the system. This dilemma definitely doesn’t justify fraud, but every logical person can see the need for improving guidelines so they don’t encourage counterproductive or illegal behavior.

Avoiding the Dead End

Hopefully, politicians will someday fix the program structures which encourage dependency. In the meantime, what’s a striving couple like the Silvers to do? Some low-income workers actually ask their bosses not to give them raises to avoid losing an equal or greater amount of assistance. But this leads to an economic dead end. The family may survive—barely—but will never improve their financial situation. Salaries tend to build on themselves. Forgoing raises means that an employee will almost certainly never hit the income required to become self-sufficient—and maybe even grow some wealth.

IRAs to the Rescue

A wiser approach may be using retirement accounts to lower taxable income and maintain assistance eligibility while salting away cash. Consider individual retirement accounts (IRAs), which anyone can open easily and freely. If Pinny’s raise brought his salary from $40,000 to $50,000, he can deposit the additional $10,000 into IRAs. There’s an annual IRA contribution limit of $6,000 per person for 2020 (over age 50 it’s $7,000), but he can simply split the $10,000 between his own IRA and one for his wife. To the IRS and NJ FamilyCare, pre-taxed income placed into IRAs doesn’t count.

Gaining Financial Independence

By using IRAs, the Silvers can get the benefits and tax credits they counted on previously even as they accept the full $10,000 raise. Then, let’s say three years down the line, Pinny gets another raise. Perhaps at a $60,000 or $70,000 salary they can make it on their own and finally cut their social-assistance ties. The IRAs will remain funded, growing into a modest nest egg. Or, if they’re still a few dollars short, the Silvers can use funds accumulated in their IRAs to cover the gap. Either way, good planning can help them move forward instead of stagnating.

401(k)s Work Too

Those with access to an employer-sponsored 401(k) plan can use it to preserve social assistance but with a slightly different twist. Employees can lower their annual taxable income by as much as $19,500 by deferring into a 401(k) plan ($26,000 for those over age 50). This generous allowance provides a lot of scope for tax planning. But unlike IRAs, many 401(k) plans also allow for tax-free borrowing of 50% of an account’s balance. So Pinny can perhaps have his cake and eat it too (or at least half of it).

Become Your Own Lender

Here’s how. He’d defer the $10,000 raise into a 401(k) account, maintaining his tax credits and NJ FamilyCare. Then he can borrow half the deferred funds immediately or leave it all there to grow, especially if his company offers a match. This can be a really nice structure. The loan is paid with interest over time, but back into his own account. Once repaid, he can borrow it back, or he can refinance the loan and take out a larger sum when more money is deposited. Loans may have a negative connotation, but this is different. You’re literally borrowing from yourself.

A National Issue

Each 401(k) plan has its own nuances with regard to how loans are handled, and some don’t offer loans at all. Human resources or the investment company holding your plan’s accounts will provide loan details by request. But even without a loan option, 401(k) accounts enable employees to lower taxable income. Recent reports highlighted that employees of Walmart, McDonald’s, and Amazon are significant recipients of social assistance. These massive companies offer full-featured 401(k) plans, and some workers are definitely using them to keep their assistance as described here. So can lower-income employees of local firms with retirement plans.

Follow the Rules

It’s important to note a few things. First, rules for other programs like SNAP or HUD don’t follow the tax code, so this strategy to lower taxable income won’t work for those. Also, NJ FamilyCare case workers aren’t always savvy about the deductibility of IRA or 401(k) deposits; applicants may have to point them out to retain eligibility. Also, the rules may change. It’s always the responsibility of applicants for social assistance to keep up with and adhere to eligibility rules. Do your homework or seek guidance from the LRRC or other reliable information sources. The government wants to help those in need. But the rules must be followed.