Under prior tax law an athlete was able to maximize tax savings by strategically planning the payment of unreimbursed employee expenses including items such as agent fees, players association dues, clubhouse dues, etc. Unfortunately, recent tax reform eliminated the deductibility of unreimbursed employee expenses for all individuals. Using retirement plans to reduce the tax on outside endorsement income is a planning strategy that still remains for athletes.
The fact that the athlete may have coverage under a qualified retirement plan with the team does not prevent the athlete from establishing their own retirement plans on any self-employment (SE) income. However, amounts contributed to an athlete’s qualified plan maintained by the team or the league may affect the amounts that can be contributed to a retirement plan related to SE income. The athlete will rarely have any employees, so the choice and administration of a plan can be quite simple. Self-employed individuals without employees can adopt a qualified retirement plan, with or without a salary deferral 401(k) feature, a simplified employee pension (SEP) plan, a salary-reduction incentive match plan (SIMPLE plan), or an individual retirement account (IRA). Under the new tax law the maximum Federal individual income tax rate is 37%, thus this planning strategy can result in significant tax savings!