SECURE Act 2.0

Written by Josh Lantz, CRPC®/ Chief Investment Officer, Financial Advisor

Hope you’re all having a great holiday season. Towards the end of December, Congress passed a large omnibus bill. Included within the bill are some minor changes to the retirement landscape.

Here is a quick summary to what’s being called the SECURE Act 2.0. The first SECURE Act changed some retirement benefits back in December 2019.

While there are many small changes in the bill, I’m purposely only mentioning the changes that impact doctors the most. 

Required Minimum Distribution (RMD) Ages: The government mandates RMDs at a certain age from some retirement accounts. The government doesn’t want you to defer tax indefinitely, so they force it out in retirement. SECURE Act 1.0 increased the age from 70.5 to 72.  The new SECURE Act 2.0 changes the ages to the following:

  1. Age 72 for those born 1950 or earlier

  2. Age 73 for those born between 1951 to 1959

  3. Age 75 for those born 1960 or later 

Roth Changes: a Roth is where you contribute after-tax money, it grows tax-deferred, and can be withdrawn tax-free in retirement if held properly. Notable changes include:

  1. Previously if you had a Roth qualified plan (e.g. Roth 401k, Roth 403b, etc) you had to make RMDs at certain ages. Effective in 2024, that’s no longer the case.  This is a positive change because it allows you to defer the tax-free money in the Roth longer.

  2. Creation of a SIMPLE Roth IRA. Previously there was only a pre-tax option.  A SIMPLE IRA and SIMPLE Roth IRA only impact small practices. They are hardly ever used by doctors because their contribution limits are less than 401ks which tend to be a better option.  

  3. Creation of a SEP Roth IRA. Previously there was only a pre-tax option.  This is a positive change. It impacts doctors who are paid 1099 or have side gigs. It provides another way to save money on a tax-free basis.

  4. When you have a Roth option at work (e.g. Roth 401k, Roth 403b, etc.), you can now elect to have your employer contribute their employer contributions to the Roth portion. This makes the employer contribution apart of your current year income. This is useful for doctors who are in a lower tax bracket today than expected in the future.

  5. No changes were made to Roth Conversions. You can continue to do this in 2023 and beyond. Now is a good time to consider this strategy with the markets being down.

  6. No changes were made to the Backdoor Roth IRA strategy. This is great news. You can continue to do this strategy into 2023 and beyond.

15 Year Old 529 Plan to Roth IRA Transfers: a 529 is an education plan. It’s a savings vehicle where after-tax money goes in, money grows tax-deferred, and is withdrawn tax-free for a beneficiary (usually a child) assuming it is used for qualified education expenses. One drawback to a 529 plan is that, given education costs vary so much, it’s possible to overfund.

  1. Previously if you removed funds from a 529 plan that were not qualified as education expenses you experienced ordinary income taxes on the gains plus an IRS 10% penalty.  The SECURE Act 2.0 modified this slightly as outlined below.

  2. Starting in 2024, if a 529 plan has been maintained for 15 years or longer, you can transfer up to $35,000 dollars to the 529 beneficiary over their lifetime.  

  3. This excludes any contributions made to the 529 in the last five years. Plus, the transfers for the year cannot exceed the Roth IRA contribution limits. Meaning you must transfer in the $35,000 over time into a Roth IRA to not exceed the annual contribution limits.

  4. Currently it’s unclear whether the 15 year clock is restarted upon changing a beneficiary. We will need to wait on IRS guidance on this.

  5. There could be several strategies for doctors that come from this change. However, it’s premature to know for sure until we hear more from the IRS about this topic.

  6. One strategy might be to fund a new 529 with a few thousand dollars when a child is born, only to transfer up to $35,000 to a Roth IRA at age 15 of the child and leave the rest of education. This certainly helps parents who are worried that they might overfund their child’s 529.

  7. Another strategy would be to look at existing 529s. Possibly split them. Change their beneficiaries, maybe even to yourself. Do the 529 to Roth transfer up to $35,000 dollars per beneficiary at year 15. This would be a backdoor to get more money into a Roth IRA. However, I wouldn’t suggest doing this yet. We need to wait for IRS guidance to know whether this is even possible.

Increased IRA Catch-Up Contribution Limits: Catch up contributions are for those age 50 and above.

  1. Starting in 2024 IRA catch up contributions will be indexed for inflation. This will allow doctors age 50+ to contribute more to retirement. The most common strategy for doctors being the Backdoor Roth IRA.

  2. Currently the catch-up limit is $1,000 if you’re age 50+. This catch-up limit is on top of the existing contribution limit. For example, in 2023 a doctor can contribute $6,500 plus a $1,000 catch up contribution to a Backdoor Roth IRA. 

Increased Contribution Limits to Qualified Plans for Those in Their Early 60’s:  Catch up contributions previously started only at age 50. This new provision layers on additional contribution limits during specific ages into qualified plans (e.g. 401k, 403b, etc.).

  1. Starting in 2025, new provision layers on additional contribution limits for those ages 60, 61, 62, or 63.

  2. New contribution limit for those ages will be increased to the greater of $10,000 dollars (indexed for inflation) or 150% of the regular catch-up limit.

  3. The result is for doctors in their early 60’s you’ll be able to contribute a few thousand more each year to your retirement plans.

Increased Qualified Charitable Distributions (QCDs) for Older Doctors: A QCD is the most effective way for a doctor at RMD ages (currently age 72) to gift to charity. A QCD gifts some/all of their RMD to charity. 

  1. Previously a QCD was capped at $100,000 dollars. However, under the SECURE Act 2.0 the QCD will become indexed for inflation starting in 2024.

  2. This is a relatively minor change only impacting older doctors who are charitably inclined.

Retroactive First Year Solo 401k for Sole Proprietors: a Solo 401k is for doctors with 1099 income or side gigs.

  1. Previously you had to open a Solo 401k by 12/31 of the calendar year to be able to fund it for that calendar year.

  2. Under the SECURE Act 2.0 you can now open a Solo 401k up to your tax filing date. Therefore, doctors get more time to open these accounts if they find out it would be beneficial to do so.

  3. For example, you earned $5,000 via 1099 in 2023. You could look at opening a solo 401k for tax-deferred contributions prior to your tax filing date for 2023 by mid-April, 2024.

Employer Contributions Towards Student Debt: this would allow employer contributions to be applied towards your student debt

  1. Starting in 2024 employers will be able to amend their qualified plans (e.g. 401k, 403b, etc.) to allow employer contributions to be applied towards your student debt.

  2. Keep in mind, this is only if your employer allows this amendment to their retirement plan.

  3. Whether to take advantage of this will depend on your tolerance for market risk and your interest rates of your student loans.

Start-Up Tax Credits for Retirement Plans: this provision would only impact those who own their practices who start up retirement plans.

  1. The provision would provide a tax credit up to 100% of plan start-up costs subject to certain limits.

  2. This is a way for practice owners to start up new 401k or Cash Balance Plans and have some of the admin and compliances costs offset.

If you’ve read this far, you’re probably wondering does any of this impact me? The answer is it probably doesn’t much. All these changes are relatively minor. However, when they do apply, we’ll make sure to incorporate this into our advice to you.

 If you have any questions, please reach out. We’re always here to help.  Have a wonderful and prosperous 2023.

Warmest Regards,

Josh Lantz, CRPC® and the entire MD Financial team

Josh Lantz, CRPC®/ Chief Investment Officer, Financial Advisor With over a decade of financial planning experience, Josh has worked on more than 450 doctors’ financial plans. “It’s very hard to find a doctor’s situation I haven’t seen before,” says Josh. This is only a snapshot of the expertise Josh brings to MD Financial. He was recently recognized in Medical Economics for Financial Adviser for Doctor’s in 2017-2018, as well as Dental Products Report’s Best Financial Adviser for Dentists in 2019. In 2022, Josh was recognized as a Five Star Wealth Manager Under age 40. He can be reached at Josh@mdfinancialadvisors.com.

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