Investment

Investment For Coaches: Location, Location, Location

It is commonly thought that the three most important factors in real estate are location, location and location. Well, that age-old adage can also apply to a family’s savings and investment portfolio.

As we have done some financial planning for families in the coaching community over the past few months, there is a common theme that has arisen, especially for high-income-earning college coaches. We have found that not enough coaches are taking full advantage of the variety of retirement savings offered by their respective universities.

Does this series of events sound familiar? A coach is hired at a new job. The coach is given a new cell phone number and maybe a rental car and keys to a hotel or apartment. He then hits the road to recruit (in non-pandemic environments of course) or immediately dives into installing or learning a playbook or instilling a new culture into an entire program. Then, it is time for spring practice, planning for summer camps, and game planning for early-season opponents. But, somewhere in that flurry of activity is a short meeting with the university’s Human Resources staff when a coach fills out a few forms or checks a few boxes online for his benefits enrollment never to be reviewed again.

As such, it has been our experience that some coaches often don’t realize all of the ways they can take advantage of the university’s retirement plan until we sit down to help them maximize the “location” of their savings.  Much is often made of asset ALLOCATION when it comes to investing and retirement savings. But, asset LOCATION can be just as important especially for those coaches and families in the highest tax brackets. Let us explain by highlighting the three most common retirement savings plans offered by universities.

Traditional 403(B) and 401(K) Plans

University employees likely consider these to be their standard plans because they have typically been offered to employees for the longest time. These investment plans have the following features:

  • Employees can defer up to $19,500 in 2021 (and an additional $6,500 if over 50 years old) on a pre-tax basis1.
  • If there is a match or university contribution of any sort, those funds are deposited into this account.
  • Both salary deferrals and university contributions grow tax-deferred.
  • All withdrawals are subject to income tax and may be subject to a 10 percent penalty if withdrawn prior to age 59 ½ years old.

Roth 403(B) and 401(K) Plans

These “Roth” plans have only been offered since 2001, but they are becoming a more common offering as time goes on. Based on a 2020 study of retirement plans offered by higher education entities2, two-thirds of university plans now offer this option. Here are some key features and reasons why:

  • Employees can defer up to $19,500 in 2021 (and an additional $6,500 if over 50 years old) on an after-tax basis; however, when combined with the “Traditional” plan deferrals, an employee’s total salary deferral cannot exceed $19,500 (or $26,000 if over 50 years old)1.
  • Salary deferrals grow tax-free.
  • Withdrawals are not subject to income tax but may be subject to a 10 percent penalty if withdrawn prior to age 59 ½ years old.
  • Accounts may be passed on to heirs on a tax-free basis.

457(B) Plans

The third type of retirement savings account that some universities offer is a 457(B) Plan. This plan is only offered by approximately 50 percent of higher education entities as of 20201, but it may be just as impactful as the other plans in some regards. We often find that high-income-earning coaches have the ability and desire to save more than the amounts allowed into the Traditional and Roth 403(B) or 401(K) plans. If for no other reason, they want to find ways to defer more income in a tax-effective manner. That is where the 457(B) Plan comes in.

Savers into this plan do not receive an additional match or contribution from the university. But they can save an additional $19,500 (or $26,000 if over 50 years old) into a Traditional 457(B) or a Roth 457(B) Plan if their employer offers these plans3. We often see the salaries of “Power 5” assistants, coordinators, and certainly head coaches offer the cash flow flexibility for them to save into a 457(B) Plan. This essentially allows them to “double up” on their savings while also deferring more income from their current tax brackets, which are usually fairly high.

We find that this savings vehicle serves as a useful and relatively tax-friendly source of income in the event of early retirement (pre-59 ½ years old), a period of job transition, or an extended period of unemployment.

We are often asked, “Why didn’t I hear about this sooner?” Well, these plans are not offered by Corporate America or in the for-profit world. These plans are reserved only for state and local government employees, as well as employees of certain non-profit organizations like colleges and universities.

Now What?

It is important to note that every university’s or state’s retirement plan has unique characteristics in regards to participant eligibility, matches and contributions, vesting schedules, etc., but we usually suggest that clients in the coaching world diversify the LOCATION of their savings through the university. For instance, if your university offers a match or makes a contribution, you are definitely going to accumulate a balance in the Traditional 403(B) Plan which you will pay tax on upon withdrawal no matter the age (and possibly an extra 10 percent early withdrawal penalty). In that case, you may consider contributing your own deferrals into the Roth 403(B) Plan which offers tax-free withdrawals if taken past age 59 ½ years old. And, lastly, if you can afford it, we usually suggest taking advantage the ability to defer additional income into a 457(B) Plan and its taxable distributions without an age restriction.

YOU MAY ALSO LIKE: Financial Playbook For College Coaches

This placement of your savings in different LOCATIONS (all within the same university-sponsored plan) allows you flexibility that may prove useful down the road as your career path takes on the twists and turns that are synonymous with the coaching profession. As always, please let us know how we may be able to help. Together, with your tax advisor, a discussion around this topic may make a difference in the success of your long-term financial planning.

About The Authors

Investment with Matt Kuerzi and Keith NorrisKeith Norris, First Vice President and Financial Advisor, and Matt Kuerzi, Vice President and Financial Advisor, are co-founders of The Derby City Group at Morgan Stanley in Louisville, Kentucky. They have combined over 40 years of experience helping families with their financial planning4. In 2019, Matt was recognized by Forbes in their first ever list of “Best-In-State Next-Gen Advisors.” He can be reached directly at (502) 394-4094 or matt.kuerzi@morganstanley.com.

Branch address: 4969 U.S. Highway 42, Suite 1200, Louisville, KY 40222

(1) https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

(2) PLANSPONSOR Defined Contribution Survey, 2020

(3) https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-457b-contribution-limits

(4) Keith Norris, First Vice President, Financial Advisor, experienced in the financial services industry since 1997.  Matt Kuerzi, Vice President, Financial Advisor, experienced in the financial services industry since 2002.

The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be appropriate for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest.

The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Past performance is no guarantee of future results. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness.

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Investment Advisers Act of 1940,  ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

Source: Forbes Magazine (September 2019).  Data provided by SHOOKTM Research, LLC. Data as of 3/31/19. SHOOK considered Financial Advisors born in 1980 or later with a minimum 4 years relevant experience, who have: built their own practices and lead their teams; joined teams and are viewed as future leadership; or a combination of both. Ranking algorithm is based on qualitative measures: telephone and in-person interviews, client retention, industry experience, credentials, review of compliance records, firm nominations; and quantitative criteria, such as: assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary, and advisors rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC, which does not receive compensation from the advisors or their firms in exchange for placement on a ranking. The rating may not be representative of any one client’s experience and is not indicative of the Financial Advisor’s future performance. Neither Morgan Stanley Smith Barney LLC nor its Financial Advisors or Private Wealth Advisors pays a fee to Forbes or SHOOK Research in exchange for the ranking.  For more information see www.SHOOKresearch.com.

Morgan Stanley Smith Barney LLC offers a wide array of brokerage and advisory services to its clients, each of which may create a different type of relationship with different obligations to you. Please visit us at http://www.morganstanleyindividual.com or consult with your Financial Advisor to understand these differences.

Morgan Stanley Smith Barney LLC. Member SIPC.
CRC 3558114      4/2021

Comments 1

  1. Pingback: Questions Answered: A Game Plan For Tax Reform - AFCA Insider

Leave a Reply

Your email address will not be published. Required fields are marked *