Dustin Eldridge, CFP®, CPWA®
Solo 401k – the retirement savings account that could save you $24,000 – $50,000 per year!
The benefit of being an NFL player, and now a college football player with NIL, is that you are a public figure, providing you opportunities to earn income outside of football based on your personal brand. Opportunities to represent and endorse companies’ products/services or deliver speeches about your life and experiences will generate additional income for you and your family.
This additional income, separate from your NFL salary and bonuses, creates a unique retirement and tax savings opportunity, one most players and even their advisors often overlook.
This opportunity is called a Solo 401(k) or Individual 401(k). The Solo 401(k) is like your 401(k) plan through the NFL (NFL Player Second Career Savings Plan), except it is for self-employed workers (with no employees other than yourself). When you earn money for your endorsements or appearances (including NIL deals for college players) you are paid as a self-employed independent contractor (1099). You can use this income to contribute to a Solo 401(k), in addition to your NFL 401(k).
First, here are some quick hit key facts to know about a Solo 401(k). Read the entire blog for all the details.
Eligibility rules – must be earning income as a self-employed individual or have an entity you own 100% of and employ only yourself (and potentially your spouse).
Contribution Limit (2022) – $61,000, with an additional $6,500 catch-up contribution if 50 or older.
Taxes on Contributions:
Traditional Solo 401(k) – contributions are made pre-tax (employee and employer), reducing taxable income for the year – could save you almost $25,000 per year.
Employer contributions are always pre-tax
Roth Solo 401(k) – contributions (employee portion only) are made with after-tax dollars and grow tax-free.
Taxes on Qualified Distributions:
Traditional Solo 401(k) – qualified distributions (after age 59.5) are taxed as income (just like your NFL salary).
Roth Solo 401(k) – qualified distributions (after age 59.5) are tax-free.
Now let’s dive into the details.
Before we discuss how the Solo 401(k) can work for you, we must cover the Contribution Limits
The total Solo 401(k) contribution limit is up to $61,000 in 2022. There is a catch-up contribution of an extra $6,500 for those 50 or older ($67,500 total).
To fully understand how the $61,000 limit (under 50 years old) works for a Solo 401(k), you want to think of yourself as two different people – the employer and the employee of yourself. As an example:
You the employer agree with Under Armour to represent their brand on and off the field for $300,000 per year for 3 years.
As the employer, you then agree to pay yourself, as the employee, the full $300,000 per year for 3 years.
As a note, you could establish an entity that you solely own and are the only employee of, instead of just using your personal name. There are some liability benefits to doing it this way that we will discuss in a later blog.
Within the $61,000 contribution limit in 2022, your contributions are subject to additional limits in each role:
As the employee, you can contribute up to $20,500 in 2022, or 100% of compensation, whichever is less. Those 50 or older get to contribute an additional $6,500 here. This can be made to a Traditional Solo 401(k) (pre-tax) or Roth Solo 401(k) (post-tax).
However, if you are participating in the NFL 401(k) plan by making employee contributions to that plan (i.e., contributing $20,500 to that plan), which you are automatically enrolled to do by the league, then you cannot double dip with this contribution as well.
Don’t worry though, you can still likely put the full $61,000 into the Solo 401(k) through the employer portion discussed below.
As the employer, you can make an additional profit-sharing contribution of up to 25% of your net self-employment income, which is your net profit less half your self-employment tax and the employee contributions you made for yourself (again unlikely you can do this given the NFL 401(k) plan). There is another limit here as well. The amount of compensation that can be used to factor your contribution is $305,000 in 2022.
How a Solo 401(k) can work for you as an NFL player or College Football player with NIL income.
Let’s continue with the example of being sponsored by Under Armour, as an NFL player, to show you how this works.
You as both the employer and employee are earning $300,000 per year (total) from Under Armour.
As the employee you are unable to make the $20,500 contribution (pre or post-tax) because you already contribute that much to the NFL 401(k) plan.
As the employer, you can contribute 25% of the $300,000, less half of your self-employment tax, to the Solo 401(k). This is limited by the $61,000 total contribution limit in 2022.
Here is how this could look (rough numbers):
Total Compensation – $300,000
½ Self-Employment Tax – $300,000 x 15.3% = $45,900/2 = $22,950
Net Self-Employment Income – $277,050
Solo 401(k) Employer Contribution Amount - $277,050 x 25% = $69,262.50
$69,262.50 is more than the $61,000 limit (2022) so you would be limited to contributing $61,000 to the Solo 401(k).
As you can see, there is some complexity to calculating the amount you can contribute, we are here to help you navigate this.
Ok great, I can save money for retirement, but you said there could be tax savings.
You are right, if this was just about saving money for retirement there are easier ways of doing that. The additional power of a Solo 401(k) lies in the tax savings you could realize today.
By contributing $61,000 as the employer, you are reducing the taxable income for yourself, as a self-employed individual.
Instead of paying income taxes on the full $277,050 net self-employment income, you would only pay income taxes on $216,050. If you are in the highest tax bracket, this could save you as much as $24,888 ($61,000 x 40.8%) in taxes.
Have a spouse? The power of the Solo 401(k) multiplies.
If you are married and your spouse doesn’t work, common for NFL players, she can also be a participant in the Solo 401(k) plan. This means you can put even more money into the plan from the same income sources (income should be greater than $300,000 per year for this to work).
There are several factors and steps that need to be considered with this strategy but this could lead to an additional tax savings of as much as an additional $24,888 (in the highest tax bracket). This puts the total savings opportunity for a couple at almost $50,000!
Again, we are the experts, don’t worry about the specifics of how this can work, we will help you with that.
A few final benefits of a Solo 401(k)
These would be specific to your situation. We still want to hit the high points.
Roth Solo 401(k) Option – for the employee contributions you can contribute to a Roth option. This means the employee contribution, of up to $20,500, is taxed today as ordinary income but grows inside the Solo 401(k) tax free. If distributions occur after age 59.5 you will not pay taxes on any of the money you take out of this portion.
Ability to take loans from your 401(k) plan – if you did make employee contributions to your Solo 401(k) (you or your spouse) you can take loans against those contributions, tax free. You do have to pay interest on the loans but you are paying the interest to yourself. This is not something we would advise you do unless there is an emergency. There are several things to consider with a loan that we would help you analyze should you need to take one.
Solo 401(k) versus other retirement plans for your self-employed income
There are other options that are like a Solo 401(k). Typically, they are not as powerful but we didn’t want to ignore them. Here are some other options you may want to consider:
Simplified Employee Pension (SEP) IRA – is another popular option among self-employed individuals with no employees (other than a spouse). You may contribute up to the lesser of the same $61,000 in 2022 or 25% of your net self-employment income. Contributions are tax-deferred (you don’t pay taxes today on the amount contributed), but there is no employee contribution portion, therefore, Roth or loan options are unavailable.
Traditional or Roth IRA – are open to all individuals earning an income. These are options we would consider for you. Typically, for high-income earners, like yourselves, there are significant limitations on contributions to these accounts. Additionally, the contribution limits are rather low, you can contribute up to $6,000 in 2022, or $7,000 if you are over 50 years old (depending on income limitations).
The one item we would consider for you and your spouse would be what is called a “Backdoor Roth” contribution. A topic for another blog.
The Solo 401(k) is a powerful retirement savings vehicle that can have a sizable impact on your tax situation. Unfortunately, it is often overlooked by other advisors.
We believe it should be a minimum requirement for every player (NFL or College) who has self-employment income. Just like putting in an extra hour of training each day in the offseason, it may not seem like the most impactful thing in the moment but that extra hour could return you more than others who aren’t willing to put in that time.
If you are interested in learning more about the Solo 401(k) and how it could save you $24,000 – 50,000 a year on your taxes, please give us a call at (214) 507-0326 or submit a request here on our website.
As a note, this material has been prepared for information purposes only and should not be relied on for tax, legal or accounting advice. Given the complexities and nuances of filing and paying taxes, this blog does not cover all the potential tax implications associated with a Solo 401(k). Therefore, a personalized consultation that includes a tax accountant may be required to navigate all the aspects of your situation.