Financial Planning for Athletes: 10 Strategies for Maximizing Your Wealth
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Despite their relatively high levels of pay, many professional athletes encounter financial challenges and some go broke entirely due to avoidable mistakes. Even if you’ve made smart decisions, you might be leaving money on the table if you aren’t getting qualified financial planning advice.
We speak with athletes every day who didn’t realize how much money they were losing by failing to take advantage of specialized financial planning and tax strategies for athletes.
The fact that the most productive part of your career will be concentrated in a limited window (your early 20s to early 30s) makes long-term financial planning both difficult and crucial. At the same time, your earning potential — on and off the field — provides a unique opportunity to build wealth and establish a legacy for yourself, your family, and your community.
To put together this guide, we asked our team of Certified Financial Planning (CFP ®) professionals, CPAs, and founders for their playbooks on financial and tax planning for professional athletes. When implemented wisely, these strategies can minimize your tax burden and maximize your wealth potential.
From navigating the jock tax to considering where to have your primary residence, let’s discuss the most relevant — and often overlooked — financial challenges that you’ll face as a professional athlete.
Financial Planning & Tax Strategies for Professional Athletes
When compared to the general public, the typical career of a professional athlete will be shaped by a few inevitable factors: high earnings, limited earning periods (at least regarding actual competition), high risk, and a high potential for reward.
Additionally, the free agency and trade-heavy nature of many of America’s preeminent leagues means that professional athletes will likely change their primary place of residency multiple times throughout their careers.
This creates a unique set of financial and tax obligations, so professional athletes should begin financial planning — and building their financial team — even before they’ve been drafted.
With that in mind, let’s take a look at some of the areas where tax and financial planning for professional athletes are needed the most.
1. Track Your Duty Days to Minimize Jock Tax
The jock tax is imposed on anyone who earns a substantial amount of their income while they are visiting another area (this tax also applies to many non-athletes).
Cities are well aware that you will often earn hundreds of thousands per day while working in their boundaries and have committed themselves to pursuing a cut of these earnings in the form of taxes.
In leagues like the NFL, which currently has just 17 games per season, the effects of the jock tax are even more pronounced.
Contrary to most American workers, athletes play, train, and otherwise create value in multiple states throughout the year (and even if they’re injured or on the bench for the whole game, they’re still earning money).
As a result, NFL players typically need to file 8 to 12 tax returns per year, while MLB players might need to file as many as 25 returns.
The ways the jock tax will be applied can vary depending on where you play and even the league you play in. In the NHL, where seven teams are based in Canada, and most players play more international games, the application of the jock tax can become even more complicated.
The existence of the jock tax has been a “financial theory” since the 1970s but has significantly increased since the 1990s. You can thank Michael Jordan, at least in part, who earned a lot of money for the State of California while facing the Lakers in the finals.
The application of this tax is also facing several challenges in court, particularly in Pittsburgh, which has recently imposed a “usage fee” for athletes earning income in any stadium that is partially or entirely funded by the public (which describes most US stadiums).
Still, for the moment, the jock tax is here to stay. However, that doesn’t mean you can’t do anything about it. By using a strategy called the Duty Days Calculation, you can minimize your total tax obligations resulting from the jock tax.
By taking advantage of the Duty Days Calculation you can potentially minimize the amount of income you’ve generated in high-tax states like California and instead allocate that income to lower-tax states like Texas, Washington, and Florida.
When utilized correctly, you can potentially save tens of thousands of dollars per year, especially if you compete in a high-income state. And every dollar saved in taxes is a dollar you can reallocate to investing in your future net worth and accomplishing the goals that matter to you.
But executing this strategy successfully is complicated, which is why it is always advisable to work with an athlete-focused financial team like AWM.
2. Take Full Advantage of Retirement Accounts
Your retirement planning will always be different from a worker with a more traditional job. You’ll be in the highest tax bracket during your playing career, but you may not get to choose when you retire.
You need to not only make sure you are addressing each of your ongoing tax obligations but also ensure you are taking advantage of every beneficial tax and retirement savings strategy possible, including deciding on your retirement state.
The most commonly overlooked tax and retirement strategies for athletes include:
Individual (solo) 401k Contributions.
Back-Door Roth IRA Contributions.
Most pro athletes will receive part of their income via W2 wages plus additional 1099 income (all income earned via NIL endorsements and other side deals).
While there is usually a base retirement plan offered for team-generated income, athletes will frequently miss out on the opportunity for retirement benefits from their supplementary income.
By creating a solo 401k plan, which is common for contracted side gigs, you can minimize your current tax obligations while also growing your future savings tax-free.
In addition, athletes who tend to follow the default route established by many teams and leagues, like the NFL retirement plan, will generally miss out on future saving opportunities. By directing your savings to a back-door IRA, you can significantly reduce your future tax obligations.
It’s not uncommon for this sort of planning to reduce your future taxes by 20% or even more, so working with a team of experienced financial planners is important.
3. Reduce State Income Tax Through Residency
Establishing residency is another aspect that you will need to think about when planning for your financial future.
What state residency jurisdiction do you currently fall under?
Where do you currently own property?
Where can you minimize your exposure to state income taxes, which may cost upwards of $100,000 per year?
These are all questions that you must ask yourself and discuss with a qualified CPA on a regular basis.
Currently, the state with the highest marginal income tax rate is California, which taxes top earners at 13.30%. At the same time, there are nine states with no income tax at all (Washington, Nevada, Texas, Tennessee, and Florida are among those with pro sports teams).
Ultimately, this means that an $18 million contract to play for the Marlins in Miami would actually be worth more than a $20 million contract to play for the Padres in San Diego.
This is why thinking about residency is so important. You must look beyond the big number you see on your contract and think about how much you are bringing home—because that’s the number that really matters.
4. Reconsider Your Signing Bonus Structure
Signing bonuses have become an increasingly important component of a professional athlete’s broader compensation package.
However, due to the structure of the signing bonus—which typically involves receiving a large portion of your contract up front—this particular benefit can create certain tax complications.
Consulting with qualified wealth advisors, in addition to your agent, is often the best way to navigate the ins and outs of any signing bonus negotiation. Your agent will focus on getting you the highest possible bonus, but they can’t advise you on the best way to structure it for tax planning. And contrary to popular belief, the ways these bonuses are structured can actually vary quite a bit.
Take a close look at how your signing bonus is structured, including a possible “abandonment clause,” how the payments will be distributed (which will rarely be all at once), residential terms, and other factors—each of these variables will directly affect how much your signing bonus is really worth in after-tax dollars.
5. Develop Sustainable Investment Strategies
Regardless of how your contract is structured, it is critical for you to think about how you are increasing your wealth over time. A large figure on paper, say, $10 million, might seem like a lot at first, but even if you’re conservative with your money, it is actually quite easy for this wealth to diminish over time.
Failure to develop a sustainable investment strategy is why nearly a majority of all pro athletes declare bankruptcy within five years of leaving their sport. Athletes—even very high-earning athletes—will rarely have enough to truly last forever.
Having a clear picture of what it costs to maintain your lifestyle and pay for your future priorities is critical to creating a customized investment portfolio. A custom investment plan should include a protective reserve of high-quality fixed income, public market investments and for those with significate wealth, private investments.
This is where it pays to use the services of a qualified financial advisor who can offer comprehensive and independent investment advice, rather than an opportunistic Wall Street firm that doesn’t have your best interests at heart.
They can evaluate the pros and cons of each opportunity that presents itself – and also give you the financial data you need to say “no”.
Since you will have so many different parties vying for your financial and social capital, you need a team of advisors who can remain impartial when providing you with investment and wealth counseling.
6. Reduce Your Tax Burden and Give to Charity Effectively Through Donor Advised Funds
Due to their relatively high level of income, athletes are often generous and contribute large amounts of their income to charity.
However, even charitable contributions will need to be carefully navigated to have maximum impact. These contributions are often tax deductible (be sure to check that each charity is established as a 501(c)3 organization) and can provide other financial benefits as well.
One of the most convenient and effective ways to give is by using a flexible tool called Donor Advised Funds (DAFs). A DAF is a giving account established at a public charity that lets a donor:
Make charitable contributions
Receive instant tax deductions
Recommend where funds get donated over time
Working with a family office wealth advisory, you can take advantage of tools like DAFs as part of your overall financial plan. This will help you maximize the effectiveness of every dollar that you give, while giving strategically, rather than reacting to every request.
7. Invest in Disability Insurance
Because you rely on your physical abilities to generate income, the financial consequences of getting injured are much higher for you than most professionals. Investing in disability insurance is critical.
Your athletic ability might be the biggest investment you own. It’s the human capital you can leverage into other forms of capital as you build wealth. Without adequate insurance, you're putting this investment — and your financial future— at risk.
The most inclusive form of disability insurance for pro athletes is permanent total disability insurance. Though rates will be higher for you than for the general public, this can help lock in future earnings, regardless of a career-ending injury.
Lesser forms of disability insurance include temporary total disability, accidental injury insurance, and many others.
Consult with a qualified CFP® to discuss how much insurance is wise for you. This is another case where you will benefit from consulting with an independent advisor, rather than an insurance salesperson.
8. Ensure The Proper Setup of Your Business
One of the best ways to secure a post-retirement source of income is to establish a business formally.
You have a natural advantage within the entrepreneurial ecosystem, especially if you operate your business in a community with high name recognition.
However, while you might find a general advantage when operating a business, that doesn’t necessarily mean you will enjoy guaranteed success.
Some common challenges you could face include licensing issues, uneven cash flows, and heavy amounts of debt.
Creating an LLC can help provide certain structural advantages, though the financial benefits that come from doing so tend to be a bit overstated.
Again, this is where working with a team of wealth experts like AWM is very beneficial. We help clients evaluate opportunities and set up optimal ownership structures when they start a new venture.
Perhaps most importantly, we can help you decide how much risk to take on with new business ideas that inevitably come up, in the context of your financial health.
9. Don’t Overlook Family Law
For any high-earning individual, it is crucial to consider the importance of family law.
Prenuptial and premaris more likely to earn sital agreements are especially common among professional athletes, especially considering the fact an athlete ubstantially more income than their partner.
And, contrary to what many people believe, prenuptial agreements aren’t just useful in the event of divorce or hostile marriages — they should be created any time significant assets are involved, even in a completely healthy relationship.
Having an agreement in place provides clarity and peace of mind for all parties, and ensures any future breakdown in the relationship will not cause a financial breakdown as well.
10. Plan Your Estate Tax
Lastly, you will also want to think about what happens to your wealth, and those who depend on it, once you are no longer around.
Estate planning involves a lot more than just making a will. Depending on how much wealth you have, you might be subject to relatively high estate taxes—that is, unless you take action to control them.
By using life insurance, family trusts, and asset restructuring, you can help ensure that your earnings will live beyond you.
If you have a spouse or children, you will need to decide how the rights to your assets and estate will be allocated, and how those assets will be managed in the event of your death.
It’s never too early to start thinking about inter-generational wealth planning — if you are planning on leaving substantial assets for your family, make sure they are equipped to handle it and put them in touch with trusted advisors.
Work with a Financial Team that Understands Your Tax Situation
Educating the next generation to competently build on your financial legacy is something your wealth advisory team should be happy to do. It’s something we integrate into our practice, along with all the strategies mentioned in this article, on a daily basis.
With the right tools, strategies, and financial team by your side, you can set yourself up for long-term financial success.
Contact us and let’s discuss how we can help establish a financial planning and tax strategy that will help you preserve and grow your current and future wealth.
