From personal experience I know that athletes have both the motivation and determination when trying to reach the pinnacle of their respective sport, but few transfer those same attributes towards their personal finances, which could easily lead to all sorts of problems. With all the financial benefits afforded to athletes abroad it can be easy to neglect the importance of preparing for retirement, especially since athletes abroad do not have the luxury of having employer sponsored retirement plans. Unlike most employees who have retirement plans like the 401(k) or 403(b), athletes abroad are left having to take care of that by themselves. But fear not, there is a way athletes abroad can reap all the tax and security benefits from a qualified retirement plan through something I like to call the overseas athlete’s ‘go-to’ retirement plan: the IRA (Individual Retirement Account). The following are the 5 most important reasons why you need start an IRA RIGHT NOW!
#1 Evokes the right mindset– Change is never easy, especially when the change is to something completely foreign, but good change is always for the best. Just think about some of the difficulties you have faced during your transition to an athlete abroad. Creating an IRA will not only start to change your mindset towards retirement, but also start to change your mindset towards your entire financial life. A majority of athletes abroad do not like to think about the financial aspect of retirement, because they are too busy worrying about the present and what to spend their money on during the offseason. Do not fall in the trap of ‘earn today, spend today.’ A better motto would be ‘earn today, invest today, spend the interest’. Contributing periodically to an IRA will force you to budget your current finances and will evoke a lasting change of your financial mindset. This change is most valuable this new mindset will help you create security in your financial future.
#2 A little goes a long way– One complaint I hear from athletes abroad is that the maximum annual contribution limit ($5,500 in 2014) is not enough to provide a comfortable retirement, compounding interest says otherwise. When money is invested and interest is earned on the principal and earnings over many years the result can be shocking, this is known as compounding interest. For example, an athlete invests the maximum ($5,500) each year for 10 years at 7% interest rate and then after 10 years the money is left invested collecting interest until retirement (roughly 30 years later). This investment would yield $46,615 a year for the final 30 years of his/her life, and this does not include Social Security and other investments. Not too bad huh? Time is your ally, the more time your money has to grow, the better. So start NOW!
#3 Tax Benefits– There are 2 types of IRA: a Traditional IRA and a Roth IRA. The main difference (you can find out about all the differences here) between the two types is the tax treatment. Traditional IRA contributions are deducted from gross income for tax purposes, but withdrawals from the Traditional IRA are taxed. This means that you will not pay income tax on contributions to the Traditional IRA, but will pay tax on any withdrawals from it. The opposite is true for the Roth IRA, meaning that you will contribute income that has already been taxed, but will not incur income tax should you decide to withdraw. The main thing you need to figure out is if the tax break will be more beneficial to you now or later. Recently, the Roth IRA has been quite popular considering tax rates are rising, but there is a maximum amount of income that you are permitted to contribute to a Roth. You cannot contribute to a Roth IRA if you are married, filing jointly, and have a combined modified adjusted gross income of over $188,000, or if you are single and have a modified adjusted gross income of over $127,000. This is just another factor to consider in determining whether to utilize a Traditional or Roth IRA. Seek out a financial professional to lead you to the best solution for you. Remember, what is best for someone else is not necessarily best for you.
#4 Flexibility– Even though the maximum contribution is currently $5,500, you can contribute as little as you want, even skipping years if you like. But, like practice for sports, investing as regular as possible will yield the best results. Also with a Roth IRA, unlike a Traditional IRA, you can withdraw up to $10,000 before the age of 59 ½ tax-free and penalty-free if it has been 5 years since your first contribution and it is for the purchase of your first home. This is a very attractive feature for athletes abroad as we are usually trying to purchase a home towards the end of your playing career.
#5 Simple– Setting up your own IRA is quite easy, contrary to popular belief. All you really need is the Internet. I did not realize how easy it was until I did it myself some years ago. I just went over to Etrade.com and signed up. After some verification questions and a verification call I was ready to start saving for my retirement. You really have no excuse to not start an IRA today…
There are many other benefits to the IRA like bankruptcy protection and the ability to pass your investment directly to beneficiaries, but I decided to focus on the aspects that are most important to you, the athlete abroad. Even though it is very easy to start an IRA account, I would still recommend consulting with a financial professional to decide the most efficient way to get started. There are many types of investments available for IRAs (stocks, bonds, mutual funds, ETFs, etc…), a financial professional is there to help you sort through all the confusion. If you have any questions concerning anything you have read or any other financial related topic, please feel free to contact me at EdwinDraughan@DieselFinancial.com.
“Plan for tomorrow, today!”