Some more sausage was made at the very end of last year in our esteemed houses of Congress: the SECURE Act 2.0.

This law has nearly 100 different provisions and at 400 pages, I’m not sure anyone who voted either for or against it had any idea what was actually in the bill. But it squeaked through two days before the end of 2022.

There are several changes to retirement account regulations as a result of the SECURE Act 2.0, and this guest post from Forme Financial walks you through the provisions most significant to physicians and other high-income individuals.

Without further ado…

 

 

You may have heard recent talk of the SECURE Act 2.0, which was signed into law on December 29, 2022. With over 92 provisions and almost 400 pages in length, this extensive piece of legislation builds on the SECURE (or Setting Every Community Up for Retirement Enhancement) Act of 2019. It sets new requirements and laws for various retirement-related accounts with the goal of improving Americans’ financial readiness for retirement. The changes begin in 2023, yet some will take as long as until 2027 to go into effect.

You’re probably wondering how this new law may specifically affect your retirement plans. At Forme Financial, we’re dedicated to helping physicians improve their financial health and wellness. So, we’ve combed through the hundreds of pages and pulled out some of the highlights that may affect you as a physician. 

 

Roth-Related Changes

 

The SECURE Act 2.0 made various changes to requirements surrounding Roth accounts. One of the most important things to note as a physician is that the new legislation contains no provisions that would limit the use of backdoor Roth or mega-backdoor Roth contributions.

Prior to the act, employer matches to Roth 401(k)s, 403(b)s, and government 457(b)s could only be contributed pre-tax. With the passing of the act, employers now have the option to offer to match directly into these accounts. In such cases, matches are taxable and immediately vested. It’s important to note that these matches will be included in the employee’s gross annual income for tax purposes. 

Required Minimum Distributions (RMDs) are the annual minimum amount that a retirement plan account owner must take out beginning at the age of 73 as of 2023. Currently, RMDs exist for Roth 401(k)s but not Roth IRAs. Starting in 2024, RMDs will no longer exist for both Roth 401(k)s and Roth IRAs.

If you have a SIMPLE or SEP IRA, you will be able to make Roth contributions to both starting in 2023. 

For physicians over 50 years old who are making catch-up contributions and earning more than $145,000 (indexed to inflation), there will be a tax-related change in those contributions. Starting in 2024, those catch-up contributions must be Roth contributions and can no longer be tax deferred.

The last significant Roth-related change will now allow account owners to roll up to $35,000 from a 529 education savings plan into a Roth IRA. It can only be done after the 529 plan has been around for more than 15 years. This $35,000 is not in addition to the annual Roth IRA contribution maximum – it’s a replacement. If your children did not use the full balance of their 529 plan account to pay for education, they can potentially roll that money into a retirement account. 

Catch-Up Contributions

 

Catch-up contributions are amounts that individuals over the age of 50 can contribute to their retirement plan to essentially “catch up” on retirement savings. For example, in 2023, those under 50 years old have a maximum contribution limit of $6500 to their Roth IRA. Individuals over 50 can contribute a total of $7500, allowing them a “catch-up” contribution of $1000 more. Every year prior, the catch-up contribution limit to an IRA was $1000 over the contribution limit. Beginning in 2024, these limits will be indexed for inflation, potentially increasing them by more than a thousand dollars. 

Catch-up contributions have been allowed for years in employer plans such as 401(k)s. Currently, the catch-up limit is $7500. Beginning in 2025, those who are 60 – 63 years old will be able to make an additional annual contribution in their employer plans of up to $10,000 (indexed to inflation).

 

More on Required Minimum Distributions 

 

The initial SECURE Act of 2019 increased the required age for taking RMDs to 72. The SECURE Act 2.0 raises the age limit to 73 in 2023 and 75 in 2033. This means that people can wait longer to start withdrawing the annual minimum amount from their traditional IRAs and  401(k)/403(b)s. 

Previously, the penalty charged for not withdrawing the RMD was 50%, the SECURE Act 2.0 decreased that penalty to 25%. 

 

Giving to Charity in Retirement

 

For older retirees who are charitably inclined, making a Qualified Charitable Distribution (QCD) is a tax-smart gifting strategy. The new changes make QCDs even more attractive. A QCD is a distribution paid to a charity directly from an IRA of someone over 70 ½ years old. It replaces taking the required minimum distribution, and previously, up to $100,000 could be distributed annually. Now, that $100,000 limit will be indexed to inflation. Additionally, IRA owners can make a one-time $50,000 charitable distribution to a charitable trust or a charitable gift annuity beginning this year. This gift counts toward the IRA owner’s annual RMD.

 

Automatic Enrollment

 

If you run or will run an organization that provides employees with 401(k) or 403(b) accounts, keep in mind that any new 401(k) and 403(b) plans starting in 2025 must automatically enroll employees with a minimum contribution of 3%. 

 

Part-Time Employees

 

Previously, part-time employees were eligible to use a 401(k) and 403(b) plan after 3 years of part-time work. The new legislation lowers that timeframe to 2 years. 

 

Student Loans

 

For training and practicing physicians with student debt, the act permits employers to match student loan payments into their employees’ 401(k) accounts. This change offers the option for those who have student loans to pay them off instead of making 401(k) contributions without missing out on the company match. This also applies to 403(b)s, government 457(b)s, and SIMPLE IRAs. Now, this is not a requirement and is up to the discretion of the employer. This provision begins in 2024. 

These highlights are a brief summary of a long piece of legislation that introduces subtle and not as subtle changes to the ways physicians are able to save for retirement. Whether you’re a recent medical school graduate hoping to take advantage of a 401(k) match or you’re in retirement and looking for tax exempt donation strategies, these changes may affect the way you handle your retirement planning. Each person’s situation is different. If you would like to learn more how the SECURE Act 2.0 may impact you and your specific retirement planning situation, reach out to us. Forme Financial advisors specialize in working with physicians to optimize their financial health across investments, tax planning, trust and estate planning, insurance, career advisory, and cash and debt management. 

Disclosure
The information provided herein was prepared for educational purposes only and is not a solicitation to buy or sell any security or insurance product, nor an offer to provide investment advice. All examples are hypothetical and for illustrative purposes only. Nothing contained herein should be construed as legal or tax advice and is not intended to replace the advice of a qualified tax advisor or legal professional. The information contained herein may have been compiled from third-party sources we believe to be reliable but cannot guarantee its accuracy or completeness.

Forme Financial is an SEC-registered investment adviser. Additional information about Forme Financial, including its services and fees, is available online at http://adviserinfo.sec.gov/.