You may not think that athletes earning millions of dollars would have to worry about outliving their retirement savings. But the reality is that a professional athlete’s retirement could last 30 years or more, so the savings needed to fund that period is far greater than the average person’s.
The first step toward a secure retirement for MLB players is to maximize their Vanguard 401(k).
In addition to a 401(k) the IRS offers many retirement plans. The chart below highlights the primary plans available to professional athletes during their playing career and the rules surrounding each:
|Plan Type||401(k)||Ind. 401(k)||IRA||Roth IRA||SEP-IRA|
|Who it’s for||Eligible for team plan||Not eligible for team plan / Significant off-the-field income||Not eligible for team plan / Minimal off-the-field income||Not eligible for team plan / Minimal off-the-field income||Eligible for team plan / Off-the-field income|
|Key Advantages||Max tax deferral and employer contributions||401(k) with potentially higher contribution limit than SEP-IRA||Retirement tax deferral||Tax-free growth||Retirement tax deferral in addition to 401(k)|
|Eligible Income||Compensation||Compensation / Off-the-field Income||Compensation||Compensation||Off-the-field Income|
|2015 Salary Deferral Contribution Limit||$18,000||$18,000||$5,500||$5,500||Not applicable|
|2015 Profit Sharing Contribution Limit||Not applicable||Up to 25% of compensation up to a max of $53,000||Not applicable||Not applicable||Up to 25% of compensation up to a max of $53,000|
|Withdrawal Age||10% penalty if under 59 1/2||10% penalty if under 59 1/2||10% penalty if under 59 1/2||10% penalty on earnings if under 59 1/2||10% penalty if under 59 1/2|
|Plan Setup Deadlines||Contribute by end of season||Establish by December 31||Establish by tax filing deadline||Establish by tax filing deadline||Establish by tax filing deadline|
The timing of contributions and eligibility are unique to each athlete throughout their career. It is essential to evaluate each plan on an annual basis with your CPA or Wealth Manager in order to maximize tax deferral while earnings are at their peak. Tax rates, cash flow, and eligibility should all be considered together to determine which plan is appropriate and when.
It is also important to note that planning doesn’t stop once the athlete’s playing career is over. Deferrals against ongoing income or conversions to after-tax accounts, when appropriate, throughout an athlete’s post-playing period can further add to net retirement income. Retirement planning begins as soon as an athlete signs their first contract, continues through to that first distribution later in life, and reaches far beyond just the employer provided 401(k) plan.