Secure 2.0 - What does it mean for your practice?

Congress passes all kinds of bills with crazy acronyms or names, like the Inflation Reduction Act that had no provisions related to inflation. So I understand if you ignored any headlines related to the SECURE Act 2.0, as you may have assumed it was related to national security or additional defense funding. It is actually the follow up to the SECURE Act passed in December 2019 and makes additional changes to retirement laws. Technically, it is the Setting Every Community Up for Retirement Enhancement Act of 2022 but let’s just call it SECURE 2.0 and see it may help you and your practice.

Key Provisions related to getting money into your retirement plan:

1) Your employer matching contributions can now be made to ROTH accounts, where they are taxed now but grow and are distributed tax-free. This could be valuable to young practice owners trying to build up massive ROTH balances as all your retirement accounts would be ROTH accounts.

2) Catch-Up Contributions have and will continue to increase. The IRA catch-up of $1,000 is now indexed for inflation so will continue to increase every year. On the 401k side (which is where you should be as a practice owner), the over 50 catch-up ($7,500 for 2023) will be indexed for inflation and a new 60-63 catch-up of $10,000 is scheduled to begin in 2024. This is great news for the older practice owner that is trying to sock away more retirement funds and get closer to that financial freedom day. NOTE - Due to a drafting error that was not caught until after bill passage, the entire catch-up option is currently eliminated from tax code but Congress and the Department of Treasury are working on a solution.

3) Starting in 2025, most 401k plans must include an auto enrollment feature for new employees. The auto contribution rate (the percentage coming out of their check, NOT your match) will start at 3% and increase by 1% each year until it hits 10%. Employees can opt out or change their contribution rate at any time. This means an end to the $500 tax credit for offering an auto enrollment plan starting in 2025.

4) Part-time workers who work 500 or more hours in two consecutive years will be eligible for your 401k plan starting in 2025. We recommend using part-time employees sparingly so this should not be an issue for a practice with a strong full-time staff.

5) The mandatory cash-out limit will increase from $5,000 to $7,000 starting in 2024. This is great if you have old employees will tiny balances still enrolled in your 401k and costing you management fees.

Key Provisions related to getting your money out of your retirement accounts:

1) The age for RMDs (Required Minimum Distributions) is now 73 for 2023 and will go up to 75 in 2033. This means that any retirement funds you have in traditional taxable retirement accounts (read non-ROTH) are not required to start being withdrawn until later in your retirement. This could be beneficial depending upon your income through the early years of retirement.

2) RMDs from ROTH 401k accounts are no longer required. This was previously a simple fix as you just transferred the ROTH 401k balance into a ROTH IRA so it just elimates a step in retirement asset allocation.

Two other interesting provisions:

1) Starting in 2024, you can rollover the balance of an unused 529 plan into a ROTH IRA. There are some significant limitations (same beneficiary, $35,000 balance limit, held for at least 15 years and no contributions in the last five) but it does eliminate that worry when contributing to the 529 that it may go unused. So if you have young kids or young grandkids, you can now plan for the unused 529 balance to help building a retirement plan.

2) Completely unrelated to retirement, the IRS finally got a definitive law passed to stop the abusive use of conservation easements. The IRS has been fighting these fraudulent schemes for over 10 years in court but this law, which prohibits an easement value of more that 2.5 the property basis, will effectively kill these schemes. Always remember that the IRS gives you plenty of legal ways to save for retirement AND cut your tax bill so don’t go messing around with any investment meant just to save you taxes.

AS ALWAYS, THE SUMMARY ABOVE IS GENERAL IN NATURE AND NOT INTENDED AS SPECIFIC TAX ADVICE FOR THE READER.

PLEASE CONSULT WITH YOUR TAX ADVISOR TO DEVELOP A PLAN THAT BEST SUITS YOUR NEEDS.