SECURE 2.0 and Your Practice: Maximizing Your Contribution Provisions

There are many moving parts to SECURE 2.0; this comprehensive legislation features over 90 provisions affecting retirement planning across various industries and employee categories. While the information in this act is massive, my goal is to ensure that by the end of this series you have a clear understanding of the most pertinent opportunities this law presents. I now want to break down provisions that apply to all clinicians, with specific notes for those who are dental and medical practice owners.

What’s Changing with Roth Options?
Many 401(k) plans already include a Roth contribution provision, enabling participants to pay taxes on their current contributions now and enjoy tax-free distributions in the future. This differs from traditional contributions, which allow participants to defer income tax on their current contributions, with income tax payable upon distribution. It often makes sense for high-income clinician owners to defer taxes to future years when their income is lower and more controllable. However, young participants with a long investment horizon may benefit from a Roth’s tax-free growth over an extended period of time. Participants earning lower income than anticipated in the future may also prefer this route.

Traditionally, Roth deferrals were limited to the participant's deferral window and were optional. However, SECURE 2.0 introduces significant changes, including:

• Optional Roth Employer Contributions: Starting in 2023, participants in a 401(k) plan may choose to have their employer matching and/or profit-sharing contributions made to a Roth account. The employee will be responsible for paying income taxes on these contributions, subject to the plan sponsor's adoption.
• SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) and SEP (Simplified Employee Pension) Roth Contributions: Clinicians who are independent contractors or maintain a SIMPLE plan with limited staff can now opt to make their employee and/or employer contributions into a Roth account. SECURE 2.0 also allows a SIMPLE plan to be converted to a 401(k) mid-year, eliminating the need for advance planning.
• Catch-Up Contributions for High Earners: Originally set to begin in 2024, this provision has been pushed back to 2026 to allow for adoption. Employees earning $145,000 or more (indexed for inflation) and aged 50 or older who are making a catch-up contribution must do so to a Roth account. The catch-up contribution is an additional deferral contribution beyond the standard limit. It's worth noting that the IRS has omitted self-employed individuals from this provision in its recent rulings.

The changes to Roth rules and opportunities are accompanied by significant age-based adjustments:

• Increased Catch-Up Limits: Starting in 2025, individuals aged 60 to 63 will have an increased catch-up limit of $10,000 or 150% of the current catch-up limit. As the catch-up limit traditionally increases with inflation, this change creates a flexible window for retirement savers in their early 60s.
• Delayed Required Minimum Distributions (RMDs): The original SECURE Act pushed the RMD age from 70.5 to 72. SECURE 2.0 further extends this to age 73, beginning in 2023. By 2033, the RMD age will be 75. These extensions provide more time for a well-planned Roth conversion strategy for retired clinicians with substantial tax-deferred savings.
• Reduced RMD Penalties: Penalties for missed RMDs have been reduced from 50% to 25% of the RMD amount. If the failure is corrected promptly and reported, the penalty decreases to 10%. While this appears positive, it may result in stricter enforcement of this provision. Historically, individuals could request forgiveness to waive the penalty for RMD errors, which was almost always granted. With a lower financial penalty, the IRS may not be as ready to waive the penalty.

What about 529 plan funds?
One additional provision that I frequently am asked about pertains to excess 529 plan balances. Under SECURE 2.0, excess 529 plan funds can be rolled over to the beneficiary's IRA account, provided the account has been maintained for 15 years and is capped at a lifetime limit of $35,000.

Make the most of the new SECURE 2.0 revisions
In addition to the tax credits and planned provisions discussed in the first article, it's evident that SECURE 2.0 will have a significant impact on the majority of financial plans. Awareness of these provisions, coupled with professional guidance, will empower clinicians and practice owners to maximize these opportunities and rules, resulting in substantial tax savings and wealth creation. As always, we're here to answer any questions you have regarding these changes and their relevance to your unique situation.

If you do not have a plan in place and would like to explore if one would benefit your journey to financial freedom, now is the time to begin. The practice integration advisors at Buckingham would love to help. Schedule a conversation with us today!

About the author
As a practice integration advisor, Thomas provides comprehensive financial advisory services to dental and medical offices, including tax, pension and retirement planning. He is motivated by a passion to help medical professionals connect the hard work they put into their practices with their most deeply held values and goals, all through Buckingham’s evidence-driven approach to true wealth management.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness may not be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-6438

This commentary originally appeared November 1, 2023 on dentaltown.com.