Professional athletes often experience something different from professionals in other fields: a relatively short career with extraordinarily high earning potential. While substantial income creates tremendous wealth-building opportunities, it also creates significant tax challenges. Most advisors focus on the standard retirement-planning options available to athletes, such as SEP IRAs, Solo 401(k)s, and traditional 401(k) plans. But when comparing a cash balance plan vs. 401(k) plans and other strategies, although they certainly provide value, they often leave a considerable amount of deductible retirement savings on the table.
For many athletes who receive income through brand endorsements, NIL, sponsorships, or revenue sharing, a Cash Balance Pension Plan (CBPP) can dramatically increase retirement contributions while creating meaningful tax savings. It also allows money to be put away now, during peak earning years, and used in the future when income is not as high.
Cash Balance Plan vs. 401(k): a larger deduction for athletes
One of the biggest misconceptions surrounding CBPPs is that they are only appropriate for physicians or older business owners approaching retirement.
In reality, younger, high-income individuals may also qualify for substantial deductible contributions, and the cash balance plan vs. 401(k) gap can be dramatic.
For example, a 23-year-old athlete earning a couple million dollars a year could generate over $124,000 of deductible retirement contributions, producing an estimated $46,000 of current tax savings, far beyond what could be achieved using a traditional retirement plan alone.
More than just tax deferral
While the immediate deduction is attractive, the true planning opportunity extends beyond simply delaying taxes. At Baker Wealth Strategies, we often incorporate permanent life insurance as one of the investments held within the CBPP.
Why?
Traditional qualified plans generally create a tax deferral. Contributions reduce taxes today, but future withdrawals are taxable as ordinary income.
When properly structured, permanent life insurance within the retirement plan, combined with an appropriate long-term exit strategy, can significantly improve the overall tax efficiency of those retirement assets.
The family planning opportunity
Many athletes provide financial support to parents or other family members after reaching professional success.
Rather than making outright gifts with after-tax dollars, the athlete can hire family members, who may then be able to participate in the business and retirement plan, allowing additional retirement contributions to be made on their behalf; this can create a significantly more tax-efficient method of building multigenerational wealth while simultaneously increasing deductible retirement plan contributions.
For example, the same athlete who earns millions could hire his parents and siblings. Because they are earning wages through the business, they can be included in the plan, and the athlete can now contribute $769,000 to the CBPP, resulting in over $250,000 in tax savings while accomplishing the goal of moving money to his parents in a tax-efficient manner.
“But my career may only last a few years”
One of the most common concerns athletes have is whether a CBPP requires decades of annual funding.
Fortunately, it does not.
Although these plans are generally designed as ongoing retirement programs, there are legitimate situations where funding may only occur for a limited number of years. Plans can be heavily funded during high-income years, after which the CBPP can end, and assets can be transitioned to an IRA. This flexibility makes the strategy particularly attractive for professional athletes whose peak earning years may be concentrated into a relatively short period.
A partnership opportunity for tax professionals
Tax professionals are often the first to see a young athlete’s full tax picture, and the first to recognize when standard retirement plans leave deductions on the table.
Baker Wealth Strategies partners with tax professionals to design, implement, and administer CBPPs for qualified clients, from the actuarial proposal through funding, investments, and ongoing administration. If you have a client who fits this profile, let’s talk.
Jennifer Baker, CPA, CFP®, RICP®
Founder
Baker Wealth Strategies
