On December 29, 2022 President Biden signed the SECURE 2.0 Act into law to encourage more workers to save for retirement. With over 90 retirement-related provisions, the legislation has a lot to it. With so many different topics covered, it can be difficult to determine which provisions are most applicable to you as a dentist. Here are some of the most prevalent changes that may apply to your financial plan, and if not now, surely in the future.
Immediate Changes
RMDs
A required minimum distribution is the annual amount you must take out of your retirement account(s), including 401(k)s, 403(b)s, traditional IRAs, SEP IRAs and SIMPLE IRAs, starting at a specific age, which is the government’s way of ensuring you are taxed on dollars you once received a deduction for. The amount you must take out is determined by dividing the value of your account on December 31st of the prior year by the corresponding IRS distribution period value. The RMD start age used to be 70.5 and was increased to 72 in 2020 by the original SECURE Act.
Effective January 1, 2023 you must start taking your RMD at age 73, meaning if you were born in 1951-1959 this applies to you. If you were born in 1950 or earlier, you should have already started taking your RMD at age 72 or 70.5 and will need to continue doing so.
In 2033, the RMD age is pushed back to 75, so if you were born in 1960 or later, you will need to start taking your RMD from your retirement account(s) at age 75.
The penalty for not taking your RMD has been reduced from 50% to 25%, but you should still ensure you take it to avoid this hefty penalty. If you work with a financial advisor, they should help you determine when you need to take your RMD and the amount required.
Further Down the Road
Roth RMDs
In 2024, RMDs are no longer required for Roth accounts in employer plans, such as a Roth 401(k) or 403(b). Roth IRAs have never required RMDs.
529-to-Roth IRA Transfer
Starting in 2024, assets can be transferred from a 529 plan to a Roth IRA in the name of the beneficiary. The 529 account must be 15 years old, and the lifetime maximum that can be transferred is $35,000.
The annual amount that can be transferred is limited to the beneficiary’s annual contribution limit and is reduced by any other IRA or Roth IRA contributions made that year. This should reduce the concern that many parents have of their child having leftover money in their 529 plan after college because leftover funds could potentially be transferred to the beneficiary’s Roth IRA.
Retirement Plan Catch-Up Contributions
Beginning in 2024, catch-up contributions for those age 50 and older must be made to a Roth account if your wages from the prior year exceeded $145,000. This prevents you from getting the tax deduction on catch-up contributions if you are over 50 and earn more than $145,000.
Effective 2025, those aged 60-63 can contribute the greater of an additional $10,000 or 150% of the standard catch-up limit in employer-sponsored retirement plans, which will be adjusted for inflation starting in 2026. Remember, the Roth requirement in the previous paragraph will apply if you earn more than $145,000 in the previous year.
Other Retirement Plan Changes
If you offer a retirement plan to your employees or are considering doing so, there are several adjustments you will be able to make to the plan over the next few years. For those that are employed by a dental office, speak with your employer if any of these topics are of importance or interest to you.
2023:
Employers can offer small incentives, such as a gift card, to encourage employees to sign-up for their retirement plan.
Employers can offer Roth contributions to an employee’s retirement plan account. An employer Roth contribution must be included in the employee’s income that year and 100% vested from the date of contribution.
Roth contributions are permitted in SIMPLE IRAs and SEP IRAs.
Employees can self-certify for a hardship withdrawal from their retirement plan.
Increased tax credits for employers with 50 or less employees for plans established in 2023. The credit is increased to 100% of administrative costs, capped at $5,000 annually. There is an additional 100% credit of up to $1,000 per employee for employer contributions made for employees earning less than $100,000 during the first year of the plan. This credit decreases by 25% each of the following 3 years.
2024:
Employers that do not have a retirement plan can offer a “starter” 401(k) plan that provides automatic 3% deferrals for employees and no employer matching contributions. Annual deferral limits match IRA limits.
An early distribution of up to $1,000 penalty-free is permitted from retirement accounts for emergencies. This is only allowed once per year, and if it’s not paid back, the employee cannot take another until three years have passed.
Employers have the option to make a matching contribution to their employees’ retirement plan account based on their student loan payment.
Employers will be able to offer emergency savings accounts within their retirement plan, up to $2,500 per employee and with certain limitations.
Domestic abuse victims may be able to take a penalty-free distribution up to $10,000 or 50% of the vested account balance.
2025:
New retirement plans must provide automatic enrollment for new employees and automatic escalation of the amount of an employee’s deferral if the employer has more than 10 employees and has been in existence for at least three years. Employees can choose to opt out of participating.
As you can see, there are quite a few major changes within Secure Act 2.0. For 2023, most provisions apply to those getting close to retirement with the RMD age changing and higher contribution limits. Over the next few years, we will see these other additions take effect. If you have a retirement plan, we encourage you to review your offering and see if any of these new options would be of value to your practice.
Charles Cooke, CFP® and Haley Tolitsky, CFP® are CERTIFIED FINANCIAL PLANNERS ™ with Cooke Capital, a wealth planning and investment management firm specializing in the needs of dentists, and Dental 401(k), an innovative retirement plan solution for dental practices.
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