The 5 Tax Planning Strategies NFL Rookies Need to Know

It happens every year. A rookie opens his first paycheck and asks in bewilderment, “Who the heck is FICA?”

It’s a humbling when you realize you won’t be taking home all the money you thought was owed to you. What’s more, it also serves as an introduction to the U.S. tax code.

After a quick overview on Social Security and Medicare, the inevitable follow-up question is, “What can I do about it?”

As a professional athlete, your hands are tied to some extent when it comes to tax planning options. Let’s begin by looking at your tax liability like a game of chess and the only way to win is to strategize moves in advance.

Step 1: Tax Deferral

A 401(k) plan is a tax-deferred savings program offered through your team and the NFLPA. Participating in the plan fulfills the “pay yourself first” principle. When you set up an automatic contribution of $18,500 (IRS max) into your 401(k) plan, you are placing your future financial freedom first. The election will also remove that same amount from your “taxable income.” Since you are in the highest tax bracket today, it is advantageous to push income into the future with the understanding that you will be in a lower tax bracket in retirement.

Step 2: Tax Free

There are few loopholes open to young athletes, but one to consider closely is a backdoor Roth IRA. Since most young NFL players do not have funds in a rollover IRA, players can take the IRA contribution limit of $5,500 and contribute to a traditional IRA, which is then eligible to convert into a Roth IRA. The conversion would place the $5,500 into a Roth account where the money will grow tax-free, for life! Although investment gains must stay in the account until age 59 1/2, your contributions are accessible without penalty.

It's advantageous to push income into the future with the understanding that you will be in a lower tax bracket in retirement.

Step 3: Tax Deduction

As an athlete, you are expected to maintain peak performance throughout the season, and this expectation comes with a financial commitment. Players need nutrition, therapy, massages, and equipment to supplement their work ethic. When added up, those costs can become a tax deduction—put simply, money that is not taxed.

As a young person, you must pay interest on student loans, travel to job interviews, and pay either state income or sales tax. Both your employer and the government expect you to fulfill these obligations and because of that, you can receive a tax deduction.

Step 4: Tax Vehicles

NFL players can take advantage of two tax vehicles to help achieve their long-term goals.

If your goal is philanthropic, the donor-advised fund allows players to get a charitable tax deduction today while they are in high income earning years. The funds can be invested for now but will be ready when the right opportunity comes to making an impact down the road.

If your financial goal is funding your child’s education, players can take excess funds today and place them into a 529 account. The 529 account is a tax-advantaged way to save for college and can be a huge advantage for those planning ahead. Once your child enters college, you can pay for things like tuition, books, and room and board without being taxed on the investment gain.

Step 5: Ordinary Income

We have all heard of the idea of “get rich quick,” typically a notion with nothing more than hope to pan out. As NFL players, you can adopt the “get rich later” mindset. Why can athletes afford to get rich later from investments? Because their greatest wealth creator is their career. 

Your goal should be to invest today and get paid for it down the road after you are done playing.

When it comes to investments, a long-term mindset is required. Whether it’s flipping a house or a stock, realizing ordinary income while playing in the NFL is giving away a sizable portion of your return to taxes. Your goal should be to invest today and get paid for it down the road after you are done playing. Long-term investments and rental income can qualify for better tax rates, potentially leading to better returns.

The purpose of taxes is to maintain everything in between what I own and what you own. Taxes support millions of jobs, benefits, and lives. But no one wants to pay more than they need to. Capitalize on your NFL career by implementing a proactive tax strategy that can save you money today and help you capture your dream!