SECURE ACT 2.0: How does it effect Physician’s Financial Planning?
SECURE ACT 2.0: How does it effect Physician’s Financial Planning? – by Johan Vako, Assistant Vice President of Wealth Management, Wall Street Alliance Group.
As it was signed into law on Thursday, December 30, by President Biden, it’s a good time to look into what’s included in the SECURE 2.0 Act and how it could affect physicians, particularly those who own their own businesses. This act, which builds on previous legislation passed in the past several years, includes many components that have the potential to change aspects of physicians’ financial lives. This legislation looks to continue to strengthen the American retirement system to make sure more people are provided for once they are no longer working. While some of these provisions will not go into effect for years, some of them will have an immediate impact on people of all walks of life, including students, retirees, and those actively working within their careers to save money and set up a stable life for their families.
Let’s look at some of the provisions to help you get an idea of what to expect in 2023 and beyond.
Larger Catch-up Contributions
For individuals over age 50, the maximum limits for contributions to employer plans has been higher to allow them to catch-up for years in the past that they perhaps couldn’t contribute as much. While in 2023 that limit is $7500, starting at the beginning of 2025, those aged between 60-63 will be able to make an annual contribution of up to $10,000. For those earning more than $145,000, the catch-up contribution amount must be made into a Roth IRA with post-tax dollars. For IRA owners, 2024 will mean the catch-up contribution limit will be tied to inflation, meaning it could increase along with the cost of living every year.
More RMD Changes
Beginning 1/1/2023, the age at which retirement account owners must start taking RMDs will go up to 73. This age will increase more in the future—starting in 2033, the age will be pushed to 75. The penalty for not taking an RMD will also decrease from 50% to 25%, and this could be reduced even further to 10% if the account owner withdraws the RMD late and submits an amended tax return.
529 Plans
Not every future plan works out. For those with 529 plans, once the account is 15 years old, it can be transferred into a Roth IRA for the beneficiary with a lifetime limit of $35,000. The rollover is considered toward the usual annual Roth IRA contribution limit. This way, the money can continue to be helpful to the beneficiary in future.
Matching Roth Contributions
For employers who wish to offer Roth account options to their employees, they will be able to provide vested matching contributions rather than only being able to offer pre-tax options. While it may take a bit for payroll and plan providers to catch up to these changes, they offer a new option to help employee savings grow tax-free. In another boon to this type of account, beginning in 2024, RMDs from employer-sponsored Roth accounts will no longer be required.
Charitable Distribution Options
For those who are over age 70 ½ and are charity-minded, there are changes to the Qualified Charitable Distribution rules. Firstly, staring in 2023, the $100,000 limit will be linked to inflation. Also starting in 2023, IRA owners may use part of the QCD as a one-time gift up to $50,000 to one of several types of charitable trusts, including charitable remainder annuity trust and charitable gift annuities. This amount will count toward the giver’s annual RMD.
Student Loan Encouragement
In good news for those who have graduated and are building their careers while paying off student loans, 2024 marks the start of employers being able to provide a sort of “match” to employee student loan payments by making a matching payment into the employee’s retirement account.
Employer-Sponsored Plan Auto Enrollment
In another aim to get Americans saving for retirement, starting in 2025, businesses establishing new 401(k) and 403(b) plans must automatically enroll any qualified employees with a contribution rate of at least 3%. There are also provisions to automatically move employees’ small balance accounts to a new plan should they switch jobs, meaning fewer forgotten low balance accounts at old employers. Coming in 2024, the bill will also create simpler employer plans that will allow smaller businesses to adopt them. These plans will primarily be payroll deferrals linked to annual IRA contribution limits.
Easier Access to Retirement Accounts for Part-Time Workers
To provide part-time employees’ more access to retirement accounts, the original SECURE Act contained provisions for employees who worked between 500 and 999 hours for three consecutive years to be eligible for their company’s 401(k) plan. This new act makes it even easier by reducing the number of years to two. As a note, employees who work at least 1000 hours a year were already required by law to be considered eligible.
Saving for Emergencies
Starting in 2024, defined benefit retirement plans could include an additional savings account designated as a Roth account for emergency savings. This account would accept contributions from non-highly compensated participants with a $2500 annual limit. The first four withdrawals every year could be taken penalty- and tax-free. The plan could even allow for employer matches, further giving employees an easy method of saving for goals as well as preparing for emergencies.
These are the some of the most impactful provisions of the SECURE 2.0 Act, many of which focus on retirement plans and setting up systems to let employers help their employees save for their retirement. From creating new employer-sponsored plans, to matching contributions for those who are paying student loans, to helping employees save for unplanned life events, these legislative changes could make big changes when they take effect. To learn more about how the changes in the SECURE 2.0 Act could benefit you and offer you new ways to save for retirement, please reach out to our office. We would be happy to guide you through these changes and opportunities as they work with your unique financial situation.
Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Wall Street Alliance Group and Securities America are separate companies.
