LeBron James is going to rip up his contract and sign a one-year deal this summer -- and it's a smart move

Joe Vardon of the Northeast Ohio Media Group has new details on LeBron James’ contract, and it shows that the Cavs star is making some smart moves to maximise his earning potential.

Rather than signing a nine-figure contract with the Cleveland Cavaliers last summer, LeBron agreed to a two-year, $US42.2 million deal with an opt out clause after this 2014-15 season.

According to Vardon, LeBron plans to exercise that opt out clause this summer. He’ll technically be a free agent, but don’t expect him to go anywhere. Vardon reports that LeBron plans to immediately sign another one-year contract with the team. In short, he’s going to rip up his current 2015-16 contract and replace it with a new one-year deal. In the process, he’ll make an extra ~$US1.7 million.

It makes sense from a financial perspective.

LeBron is due to make $US21.6 million in 2015-16 under his current deal. When he signed the contract last summer, that was the maximum amount of money he could get. LeBron’s max contract was capped at 35% of the 2014-15 salary cap with 4.5% annual raises.

By declining that option for the 2015-16 season, he’ll be able to re-sign a new max contract under the same parameters (35% of the cap). But since the 2015-16 salary cap will be significantly higher than the 2014-15 salary cap was, his max salary next summer will be larger than his max salary was last summer.

With a new contract, LeBron now stands to make $US23.3 million in 2015-16 — a $US1.5 million increase from his current deal — based on the current projected cap for next season from salary expert Larry Coon. Even if something crazy happens and the salary cap doesn’t go up as much as expected, the rules are such that LeBron is guaranteed a 5% raise from his 2014-15 salary if he signs a new max deal — which is still more than the 4.5% raise he was due under his old contract.

The reason he’s only signing a one-year deal is that the salary cap is going to explode in 2016-17 because of the league’s new TV deal. If LeBron signed a long-term max contract in the summer of 2015, it would be worth tens of millions of dollars less than if he signed a long-term max contract in the summer of 2016.

There’s a reason NBA players never sign year-to-year deals like this. NBA contracts are guaranteed no matter what. For most guys, the smart move is to take the guaranteed money while you can get it. But for LeBron — who outperforms the maximum contract by a significant margin and hasn’t had many injury issues in his career — it’s a risk worth taking, especially considering the financial upside of signing a max deal in 2016.

LeBron is squeezing $US1.7 million out of the team now while also setting himself up to cash in when the new TV money sends the value of max contracts through the roof.

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