"This is the big leagues"! My exact thought as I was walking aimlessly through the Detroit Tigers clubhouse in 2011.
I was a 20-year-old trying to figure out how this "big league" thing worked.
It felt like every need I had was being met proactively by a world-class staff and clubhouse attendants.
I never thought a clubby would help me save thousands of dollars on my taxes.
Yet, that is exactly what happened when a clubhouse attendant in passing asked if I was contributing to the MLB 401(k) plan.
It sounded Greek to me, "401..what"?
You see in 2011 minor league players had no access to a team-sponsored 401(k) as they do now. So when I got called up to the big leagues I didn't know what it was, how it worked, or the benefits of doing it.
Funny to think about now but the conversation has saved me thousands (probably more) off my lifetime tax bill.
In this blog, I am going to break down everything you need to know about the Major League Baseball 401(k) plan. As you read this, remember retirement planning for professional athletes starts while you are still playing.
MLB 401(k) Plan
A 401(k) plan is a company-sponsored retirement plan. Said another way, it is a benefit an employer offers you to further incentivize you to stay with them. A 401(k) is one of the most standard benefits companies provide.
The reason is simple, it is an efficient way to save for retirement.
You see the IRS provides benefits for 401(k) contributions.
Contributions work in one of two ways:
Roth Contributions
Traditional Contributions
The difference between the two is how those contributions are taxed.
Roth contributions receive no current-year tax benefits but your money grows tax and comes out tax-free after age 59.5.
Traditional contributions receive a current-year tax benefit (deduction) but your money grows tax deferred and is taxed upon taking it out.
In short, one type provides a benefit today while one provides a benefit in the future. The key is understanding what your tax bracket is today and what you are projecting it to be in the future.
Another note on 401(k) plans is that those tax benefits don't come without a catch. You see contributions are subject to a 10% penalty should you withdraw them before the age of 59.5.
***Roth contributions can be taken out but all investment growth is subject to penalties.
Now that we understand the basics of 401(k) plans, let's dive into how the Major League Baseball 401(k) plan works.
MLB 401(k) Eligibility & Enrollment
Remember how 401(k) plans are company-sponsored plans? Well, that means there are often restrictions as to when you are eligible for the plan.
For the Major League Baseball plan a player must be on the active 26-man roster or the MLB injured list.
Once you become an active player you are automatically registered on the plan.
That does not mean you're optimizing your situation, it simply means you are enrolled.
In spring training teams will provide you with a form to elect your plan status and contributions (more on that later).
Our team at Moment helps players each year to ensure all eligibility and enrollment forms are completed correctly.
Here are the key details of the MLB 401(k) plan:
The plan is held at Vanguard
Your eligibility is based on your roster status
MLB provides players with enrollment forms in spring training
So remember this while you are automatically eligible and enrolled upon being added to the active roster, that is just step one.
The understand how to maximize the MLB 401(k) plan we have to understand the who, what, and how money is contributed to the plan.
MLB 401(k) Contribution Limits
The MLB 401(k) plan has three different ways you can make or receive contributions.
Pre-Tax Contributions (Players make these)
Post Tax Contributions (Players make these)
Major League Baseball Contributions (Team makes these)
A pre-tax contribution means that you are putting in money before paying taxes on this money. Remember how traditional 401(k) contributions receive a tax benefit? This is how.
A post-tax contribution means that you are putting in money that you have already paid taxes on.
MLB contribution is a direct team contribution to your 401(k). More on this later but this amount varies from year to year.
In 2024 the contribution limits are as follows:
$23,000 pre-tax
$69,000 employee + employer (post-tax + MLB)
The key to understanding the MLB 401(k) plan is understanding how MLB contributions work. This is not a match (common for a 401(k)), this is a direct team contribution.
That means a player is not required to make a contribution to receive this benefit. Instead, they receive this benefit based on that year's service time.
For a player to be eligible for a team contribution they must achieve a quarter of the year of MLB service time in that season. That equates to 43 days on the active roster.
You see teams are assessed a luxury tax based on going over certain levels of spending. In 2023, that spending level was $233,000,000.
1st time offenders pay a 20% tax
2nd time offenders pay a 30% tax
3rd time (or more) offenders pay a 50% tax
A portion of that tax is allocated to player benefits including MLB 401(k) contributions.
So the more teams spend (and go over the threshold), the more money players receive in team 401(k) contributions.
Here is an example of what this looked like in 2023 for players who had a full year of service time.
*Note Max 401(k) contribution in 2023 was $66,000.
$22,500 max pre-tax contribution
$40,000 MLB contribution
$3,500 max post-tax contribution
Players, to receive the maximum benefit from the MLB 401(k) plan you need to make sure your financial team understands all the details of the plan.
MLB 401(k) Considerations
Now that we understand what a 401(k) is and how the MLB 401(k) contributions work, let's discuss the fine print.
You know the stuff that matters that no one ever talks about.
Investment Selection
When you start contributing to the MLB 401(k) plan that is just a contribution, not an investment. That money will be automatically put into a conservative life strategy fund administered by Vanguard.
You need to work with a qualified financial team to make sure your contributions are properly invested based on your goals.
I have seen players leave hundreds of thousands on the table by not adjusting their investment selections.
Plan Rollovers
At some point, your playing career will end and you will have a choice to make. You can roll over (move) your 401(K) to an IRA or keep it at Vanguard.
An IRA stands for Individual Retirement Account and essentially functions the same way as a 401(k) without the company component.
There are no tax consequences involved with rolling this money from the MLB 401(k) to your IRA. Yet there are several key tax planning considerations to understand.
If you want a deeper dive into tax planning for professional athletes you can check out that blog. For this one just understand you need to make sure there is a tax strategy in place should you wish to make this move.
The transition time from current player to former player can be an optimal time to think long-term about tax planning.
Everyone focuses on the massive salaries you can earn as an MLB player and rightfully so. Yet, it is critical to not overlook the benefits the MLB 401(k) plan provides current players.
Done correctly this can be a key building block to your retirement planning as a professional athlete.
I have seen players spend years in the big leagues and fail to understand the key details of the MLB 401(k) plan.
That my friends is the quickest way to take a key benefit and waste it.
If you are a current or former Major League Baseball player looking for help understanding the MLB 401(k) plan schedule a call with our team.
If you are looking for more on retirement planning as a professional athlete check out this video on how we think about this.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions I received frequently about this topic.
Where is the MLB 401(k) plan held? The plan is held at Vanguard and can be accessed using their website.
What is the maximum contribution a player can make in 2024? The maximum contribution allowed in 2024 is $69,000. This includes both team and player contributions.
Do players have to do anything to receive team contributions? All players who achieve at least 43 days of MLB service time in 2024 will receive team contributions. A player maxes out team contributions with a full year or four quarters (43 days) of MLB service time.
Are player's 401(k) contributions automatically invested? Yes, contributions are automatically invested into a Vanguard conservative investment fund. Players can then elect to change future or current contributions based on their goals.
Can players move their MLB 401(k) plan after retiring? Yes, a player can roll over their MLB 401(k) to an Individual Retirement Account if they choose. While there are no tax consequences for this there are several tax considerations players should understand before doing this.
*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
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