Optimizing Your Taxes with an Individual 401(k) | PGA Players' Podcast with Aaron Goldberg & Zach Miller
Enjoy PGA Players Podcast? Leave us a 5-star rating & review to help others like you discover the show!
Episode Summary
As a professional golfer, tax optimization is one of the most important areas of your wealth to address. While investments are a crucial part of growing your overall net worth, the savings you could see on tax optimization could completely blow out of the water any of your annual investment returns.
In this week’s episode, Aaron is joined by Super Bowl champion, 8-year NFL veteran and AWM colleague Zach Miller to discuss some of the strategies for professional athletes to optimize their tax situation, and weigh the pros and cons of a SEP IRA vs an Individual 401(k). Make sure to listen to find out the one thing to look for to see if your financial advisor is tailoring your plan like a pro, or treating you like the general public.
Episode Highlights
The importance of taxes (1:38)
“Investments are a great part of your financial picture and we want to do our best on the investment side, but we're paying 50% in taxes in most places…If we can optimize those taxes, that's going to completely blow out of the water any investment returns.” – Aaron Goldberg
SEP IRA vs Individual 401(k) (2:36)
The 3 reasons why you’d want to use an Individual 401(k) (3:16)
Zach’s experience with endorsement income (7:56)
What professional athletes should consider to have tax savings in the future (11:46)
Stay Connected
AWM Capital: IG | LinkedIn | Facebook | AWMCap.com
+ Read the Transcript
Aaron Goldberg (00:02):
Hey, everyone. Welcome back to another episode of the PGA Players Podcast. I'm your host, Aaron Goldberg, Certified Financial Planner and Private Wealth Advisor at AWM Capital. Today, I'm joined by Zach Miller, Super Bowl Champion, eight year NFL veteran, father of four, recent CFP test passer. That's probably the worst way to say that, but you passed the test. That's what we want to see. Now, just working on the two years of experience part of the credential, but he's also one of my colleagues here at AWM and a great part of the team. Happy to have you here today and looking forward to talking.
Zach Miller (00:43):
Yeah, I appreciate that warm intro. I've heard that the test is the hardest part about the CFP credentials, so I'm glad to have passed that thing before the whole world shut down in March. I'm working on that experience requirement, but I mean the reason I'm happy about joining you for this podcast today is because we hire people like you that are CFP. You have the experience with your golf. You're so good at golf, but you didn't just stop there. You went on, you became an advisor, you want to help those golf athletes. I'm in a similar situation. I played in the NFL, but I see so many guys that need the financial help and they're not getting it from a lot of places they're seeking out that help. I think it's been great getting to know you and really the whole team here at AWM has been exceptional to see the kind of work that we're doing for so many of our athletes.
Aaron Goldberg (01:38):
Great. No, it's nice to hear that and get some reassurance from some former athletes like yourself that have been in those shoes, myself as well, to give us some assurances that we're doing the right things for our current clients as well. Today, we have a good topic. We're going to talk about the individual 401k. I know everything that we talk about is so exciting, but today the individual 401k is going to be the exciting topic, but really what we want to look at is how are we going to optimize your taxes? Investments are a great part of your financial picture and we want to do our best on the investment side, but we're paying 50% in taxes in most places. If you're in a no tax state, you might be closer to the 40% mark, but you're going to fall somewhere in that 40 to 50%.
If we can optimize those taxes, that's going to completely blow out of the water any investment returns. That's why we want to maximize our tax savings if we can. As you start making money on the golf course, or if you've been making money off the golf course, you want to check your accounts right now and make sure that you have an individual 401k. You may have a SEP IRA and that's pretty good, but there's ways that we can make that a little bit better and that's by using an individual 401k. I didn't even know about this in my playing days. My accountant, a specialist in athletes. He never brought it up to me. He just said, "Hey, SEP IRA. You're a sole proprietor. Sure, go for it." It's one of those things that I wish I would've known about. I know Zach and I have talked about that as well. He wishes he would've known about it. We'll get into that in a minute.
There's three main points of why we're going to use the individual 401k. Number one, we're going to be able to defer as much as possible into that account compared to any other plan. Number two, we're going to have some flexibility with the tax savings. In most years, like I mentioned, you're going to be taxed in that 40 to 50% tax rate. We want to save taxes now if that's the case, so we're going to do a normal 401k contribution. This year, it's 57,000 that we can contribute. Next year, it goes up. Every year, it goes up a little bit, theoretically based on cost of living adjustments, but that's $57,000 that we can save close to 50% on to not have to pay to the IRS and our state if we don't have to.
That's nice, but maybe we have a year where we get hurt or we play poorly and we have a lot of expenses, and our income's not that high that year and we're in a lower tax bracket. We have the option to make a Roth 401k contribution, which is a pretty unique opportunity for a retirement plan because a SEP IRA doesn't offer that. If you have a bad year or you get hurt and you're just collecting your disability income for the year, that's not taxable. We might be in a super low tax bracket and we want to take advantage of that. We don't want to just put our head down and be bummed that we had a bad year. We want to take advantage of that tax opportunity, so we pay taxes on that, make the Roth contribution, that's now a tax-free account going forward. The benefit of that is it's tax sheltered for in perpetuity.
If that money is invested in a non-retirement account, where we're paying taxes on our gains and our dividends every year, that creates, looking at a number of research papers, about a 1.5% lag on your returns per year. Compounded out, that makes a huge difference. I'm going to give you an example in a minute of what that can add up to, but the third benefit of the solo 401k or the individual 401k is not only can you fill up that 57,000 for this year, but you can also still have the opportunity to make what's called a backdoor Roth IRA contribution. That's another $6,000 if you're under 50 years old. It doesn't sound like a lot of money, but if you add that up, add in that extra 1.5% return because you're not getting the tax drag every year, makes a huge difference.
The hypothetical is you're 25 years old right now. You're going to save that $6,000 extra into a backdoor Roth every year until you're 60. That's 35 years of $6,000 contributions. Quick math, I think that's $210,000 in contributions, so it's a good amount. Well, let's say that your account's growing at, again, hypothetically 6% rate of return on average. It's a good rate of return, but something that's fairly realistic. Inside of that backdoor Roth or that tax sheltered account, you get to keep all that growth the whole time and let it keep compounding. If that's in a non-retirement account, we're going to have that tax drag I was talking about, so we're going to assume more of a 4.5% return after tax, which is what's most important. That ends up at 60 years old... So 35 years down the line, that adds up to $180,000 in difference. That's just for organizing your accounts.
I don't know about you, I'd like that extra $180,000 just by doing some administrative work. You're not doing it as the athlete, that's our job to do that for you and that's where our expertise kicks in. I wish I had somebody in my corner when I was playing that would have pointed this type of stuff out. There's one other benefit. If you're married and you have an individual 401k, you can have your spouse make those contributions as well. Now we've almost doubled what those contributions to these tax advantaged accounts can be, whereas with a SEP IRA, you can't do any of that. That's where the differences really come in, and it's the nuances and the understanding of as an athlete, as a golfer, what really goes on behind the scenes.
Zach, I know for professional golfers, all of our income is 1099, so it's pretty standard in terms of as a golfer, this is what they should do. For an NFL player, you're paid as a employee on the field, but you guys get endorsement income and that's 1099. Did you perform this strategy?
Zach Miller (07:56):
That's right. We do get endorsement income and I had significant endorsement income, enough to max out individual 401k every year that I played. I didn't know about this at all. I had a broker at Merrill Lynch and a separate CPA. They were siloed, so there was no communication, there was no coordination. The amount of money that that would have turned into by now, with you take the tax savings and the compounding, would be in the millions. I mean, you combine that with the backdoor Roth, which will add more a taxed advantage account that you don't have to pay taxes once you take it out. I mean, these are significant savings that create wealth that you're not going to get at Merrill Lynch, Morgan Stanley, UBS. They don't want to do financial planning because they can't bill on it. It's not part of the way they get compensated, so there's no incentive for them to provide this value to them. It's why athletes deserve someone that's specialized for their situation.
What Aaron is for golfers is the same thing that can be applied to the other sports. Each person at AWM takes all that expertise, whether it's a CFP, the CPWA, all those credentials and all our tax side that spends so much times on lowering your tax bill and turns that into real money in your pocket. I know from my personal experience, I would have significantly more amount of money that I wouldn't have paid on my endorsement income, and put that into an individual 401k. Those are real dollars that I would have now that I don't have because I received sub-par, sub-optimal advisory.
That's really what it comes down to. You need to vet the people that advise you and know that they are finding every strategy, finding every way to maximize your net worth according to your outcomes you desire. That should be what your advisor's goal is and having it in a coordinated strategy. I know, Aaron, you obviously have so much expertise in the golf world, but I will say just since I've worked here, I've seen the value we're adding in contributing to our client's individual 401ks, saving them in tax bills. These are real contributions that we're making for clients. I know that you obviously care so much and, I mean, you've got to have the same feeling about seeing it in action.
Aaron Goldberg (10:09):
Yeah, absolutely. I mean, one of the reasons I brought you on here today is you're big enough that you can call out these big wirehouses and stuff. I'm going to be doing it a little bit more subtly, but all joking aside, it's one of those things. The tax savings doesn't necessarily show up in the returns on paper and so some of the brokers, some of the other advisors, all they're focused on is the returns. If they can't show it to you on paper like that, they feel like it's not as important and if they're not getting paid to do it, they're not going to do it. When you hire a true wealth advisor, somebody that's going to look at your overall net worth and what's the value of you as a household after tax? We're trying to maximize that. That's all we're trying to do.
If you have any questions, we're more than happy to answer them. We're just trying to educate and make sure that we're getting out the right information, not only to golfers, but to all athletes so that they're asking the people in their world and in their inner circles the right questions going forward. I think the only other topic I had... Not even topic, but point we had about the individual 401ks is going forward, is there any other thing that you would be thinking about if you're an athlete and you wanted to have tax savings in the future? Let's say you have more endorsement income after you retire. Let's say you're Peyton Manning. We were just talking about him. He's going to have a bunch of off-the-field income. Is this a strategy that you can keep applying after you're done playing?
Zach Miller (11:46):
As long as you've got that 1099 income coming in like you do with endorsement deals, you can keep doing the strategy. It's worth it to really evaluate whether you're doing a Roth 401k or the individual 401k because you're going to have a large tax bill later in life, too, if you're lucky enough to grow your net worth like we talk about here. Those are strategies that you can just keep on implementing throughout your life.
Aaron Goldberg (12:12):
Perfect. All right, guys. Well, today, that's it. I appreciate Zach, you joining me, and dispensing some of your knowledge and your experience, and creating a real life athlete experience for us. Hope you guys check us out next week and you can check us out on the website and subscribe at PGAPlayersPodcast.com. Until next time, stay hungry, stay humble and always be a pro.