Planning for Retirement, AP-Style

The following is a guest contribution by Jack Sparrow, a long-time professional advantage player and friend of AP Street.

First, let’s start with a disclaimer. I am not a tax attorney and this blog should not be construed as professional guidance. I’m just an AP with an eye on the future and I want to share what I’ve found with some fellow APs who may not have thought that far ahead yet.

The intended audience for this post are APs who have gone pro in the eyes of the IRS. That is, you file as a professional gambler with a Schedule C or using an S-corp setup. I’m sure many blogs could be written about the pros and cons of filing as a professional gambler, but for now I’m assuming you file as such and I’m going to focus on one of the stronger benefits: tax-deferred retirement savings.

Advantage play is, by nature, a cash-heavy business. When you combine the desire to build a bigger bankroll with the hassle of dealing with banks and their cash paranoia, many APs end up not putting money “into the system.”  Speaking delicately, some APs may be inclined to under-report income they keep in cash. While avoiding paying a silent partner who freerolls your earnings is tempting, with inflation ever creeping up on you, storing your wealth in straight cash is just not a smart approach. Additionally, an AP career has an uncertain longevity. Even if you never run out of plays, you’ll reach a point where you can no longer subject yourself to the AP life.

Fortunately for the self-employed professional AP, there is a big benefit you can take advantage of in the form of higher contribution limits for Individual Retirement Accounts (IRA). As you probably know, the IRS allows you to contribute $5,500 per year to a qualified traditional IRA. However, if you are self-employed you can contribute both the employee and employer share. Your contributions lower your taxable income and the investments grow, tax-deferred, and can be withdrawn starting when you are 59.5 years old. At that time, the withdrawals are taxed at the prevailing rate, but assuming your income is fixed and your expenses are more constant, you should be able to position yourself in control of your tax structure. 

There are two main types of IRA’s for the self-employed. The SEP-IRA (Simplified Employee Pension) and the solo 401k. The SEP-IRA, as the name implies is the more simple to setup and administer of the two. The Solo 401k is, as it sounds, a 401k plan that exists for your sole proprietor business. The Solo 401k (sometimes referred to as an i401k) requires a bit more paperwork but it is nothing that any competent AP couldn’t handle. The main difference between the two is how much you can contribute per year. I’ll be using the 2017 tax year numbers here.

Both options limit your contributions based on total net profit. The SEP-IRA, belying its name, uses a complex calculation to reach that. In the end, the SEP-IRA works out to 18.6% of the business net profits if you are Schedule C and about 25% if you are an S-corp. Meanwhile, the Solo 401k allows you to contribute a salary deferral of up to $18k per year on top of those percentages.

 Now, if you make more than $290k per year, then it doesn’t matter which one you have; you’ll be capped at $54k in total contributions. If you make less than that the Solo 401k will always afford you the ability to contribute more than the SEP-IRA. Let’s use the example of a single Schedule C filer who has a net profit of $100k per year as an AP. 

Maximum Contribution:

No IRA : $0

SEP-IRA : $18,587.05

Solo 401k : $36,587.05

Estimated Tax Liability:

No IRA : -$17,126

SEP-IRA : -$12,479

Solo 401k : -$7,979

If you can afford to contribute the maximum amount, do so. You grow your retirement nest egg while at the same time paying less to Uncle Sam. Furthermore, if you’re married and your partner contributes materially to the business (e.g., they do your accounting for you or book your flights) then congratulations, your contribution limits have doubled!

In our example above, if the AP was married and made a net profit of $100k per year, they could contribute up to $54,587 a year ($18k salary deferral * 2 and the $18,587 employer contribution) and have an estimated tax liability of -$2,759. Of course, there are other complexities to making $100k per year in a volatile gambling business and then socking over half of that away for possibly decades. However, there are many who will see through the details of the numbers to the general benefit of getting money now into the system, tax-deferred, for use at a later date. 

So there you have it. We’ve established that a self-employed AP can lower his tax burden while effectively preparing for a life after the casinos. We didn’t scratch the surface of how to establish a SEP-IRA or Solo 401k though. Also, for the rare AP who files as a professional but still works a “day job” your contributions to an employer’s retirement plan also count against your $54k annual limit. Additionally, there are other investment options that are available when you’re not tied to an employer’s retirement plan. Perhaps those topics can be approached in a future post, but in the meantime please use Google to answer many of your questions or ask them in the comments section below.