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Happy New Year! As another year passes by, we have yet another law passed by Congress to keep an eye on – The SECURE ACT 2.0! 

Congress passed a behemoth 4,000+ page omnibus spending bill in December including the long-awaited retirement-related bill. While the law didn’t have a single part with a massive impact like the original SECURE Act in 2019 (dramatically changing estate planning with retirement accounts), it has a much longer list of updates that’s sure to take your breath away. 

The breadth of topics addressed is truly mind-boggling, so let’s dive into the most important parts of the Act optometrists need to keep in mind. 

Some rules take effect immediately, others in the future. Check out the end for a graphic summarizing the rules and what year they take effect. 

529-to-Roth Rollover – Starting 2024

Perhaps the topic getting the most press, the SECURE Act 2.0 created the ability to roll 529 dollars into Roth IRAs tax-free! 

529s have been a fantastic tool to prepare for your kids’ (or other family members’) college costs. You don’t pay tax on the investment growth in the account. If you use the funds for qualified higher education expenses, you can withdraw the funds tax-free. The rules have been expanded to include K-12 expenses and trade schools too. And depending on your state, you may even get a state tax benefit for using your state’s plan.

A big drawback of using 529 accounts is the uncertainty around whether your kids will even go to college. If they don’t, your options are limited: either use the funds for another family member or withdraw the funds, paying tax on the growth and a 10% penalty.

Starting in 2024, you can rollover up to $35,000 lifetime total from a 529 to a Roth IRA, shielding at least that much from the college uncertainty. 

There are several rules to follow:

  • The 529 must have been opened and maintained for 15 years+.
  • The Roth IRA getting the funds must be in the name of the beneficiary of the 529, not the owner.
  • Any deposits into the 529 within the last 5 years (and the earnings on those deposits) can’t be moved to a Roth IRA.
  • You can only rollover an amount per year up to the regular IRA contribution limit in that year (e.g., $6,500 in 2023). And it’s lowered by how much you actually contribute to any IRA in the year. 

There’s a lot to be clarified from the law. For example, if you change the beneficiary of the 529 from your child to yourself so you can roll the funds to your own Roth IRA, does that reset the 15 year clock? If so, do we plan to open 529 accounts for both parents as well as kids to start the clock?

It seems the intent is to help the parents with the uncertainty, so I’m hopeful we’ll find out it won’t be that complicated. 

Planning Notes: What if you’re likely to have much more than $35,000 in a 529 and are still worried about locking the funds away for college? Even if you can change the beneficiary to another family member? You may want to partially use a taxable investment account alongside the 529 accounts to provide more flexibility. Split the deposits – you’ll give up a bit of the 529 tax-free growth but provide yourself with more flexibility. 

There may be an interesting use case for kids and grandkids. You can deposit a pretty large amount into 529 accounts in one year. In fact, you can front-load up to 5 years’ worth of the annual gift tax exclusion in one year! In 2023, that’s a total of $85,000 per beneficiary, per person contributing to the 529. 

You can potentially stuff money into a 529 when a kid/grandkid is born, wait 15 years until the time limit has passed, then transfer funds up to the limits into a Roth IRA for their benefit. The child would need to have earned income to do this, just like paying them from your practice and making the Roth contribution. But we have a new planning point to consider when cash flow allows for it. 

Retirement Plan Updates – Roth-Related

Congress seems to be leaning more into Roth-type accounts, perhaps to increase shorter-term tax income. Here are the major points:

Goodbye RMDs for Roth 401(k) Accounts – Starting 2024

Roth accounts inside of 401(k) or 403(b) plans have been great options to have. But with one major drawback – you had to take Required Minimum Distributions (RMDs) when you reached the appropriate age. This usually led to a rollover to a Roth IRA account at retirement, which doesn’t have RMDs. 

Congress finally changed this, and eliminated the RMD requirement with Roth accounts in 401(k)s, 403(b)s, and other workplace retirement accounts. 

Planning Note: The rollover decision is now about costs in the 401(k) plan, investment options in the plan, withdrawal needs if retiring early, and liability/bankruptcy protections in both accounts. 

SIMPLE Roth IRAs and SEP Roth IRAs Arrive – Starting this year (2023)

You now have two more opportunities for Roth contributions! You can create both SIMPLE Roth IRA accounts and SEP Roth IRAs. Both were previously only pre-tax contributions.

Although this technically starts in 2023, it will take some time before your custodians, the IRS, and your practices are able to update paperwork, policies, and procedures to get this going. Hopefully, it’s not too far into the future.

Employer Match Can Go to Roth Accounts – Effective now

Practice owners and other employers with 401(k) plans can now make matching contributions to employees’ Roth accounts.

In the past, the practice/employer deposits were always pre-tax. At retirement, the funds were taxed when withdrawn by the employee. Now, you can deposit them into Roth accounts to be withdrawn tax-free in retirement.

Those dollars will be included in the employees’ income. And they can’t be subject to a vesting schedule (can be taken immediately if the employee leaves). 

This will also take some time for you and plan administrators to update paperwork, policies, and procedures to make it reality. 

“High” Wage Earners Required to Use Roth Option for Catch-Up – Starting 2024

As mentioned above, the SECURE Act 2.0 gives more flexibility to choose pre-tax vs. Roth, it also may take the option out of your hands. The government giveth, the government taketh, I guess. 

If you’re 50 or older, you may choose to make “catch-up” contributions to your 401(k) in addition to the regular limit. Starting in 2024, if your prior year’s wages were higher than $145,000, you are required to make “catch-up” contributions to the Roth account. In the past, you chose between pre-tax and Roth, with the pre-tax deduction often making sense during your peak earning years. 

This does not apply to IRAs, including SIMPLE IRAs, and creates some interesting planning quirks.

Planning Notes: The language of the law seems to specifically say wages, and wages from the “employer sponsoring the plan”. If you change employers mid-year, you now have a new employer sponsoring a new plan and may be able to sidestep this requirement.

If your partial-year wages were under the limit with your old and new employer when making the switch, you may be able to bypass the requirement for potentially 2 years! 

Also, if you are a self-employed OD without wages (sole proprietor, single-member LLC, or partnership), or an S-corp owner with wages just below the limit, you may bypass the requirement altogether. 

Another Important Note Not all 401(k) plans allow for Roth accounts. What if you or a team member fall under the rules and are required to make Roth catch-up contributions…but you don’t have the Roth option available in your plan?

It appears that, in this situation, no one will be able to make catch-up contributions to the plan at all! 

This new law is an opportunity to talk with your plan provider and third party administrator to make sure your plan includes the bells and whistles it needs. Even if no one is 50 or older yet, it likely makes sense to have a retirement plan that’s fully-equiped and won’t fail down the road. 

Increased Catch-Up Contributions in Your 60s – Starting 2025

In 2025 and later, you’ll be able to make higher catch up contributions if you’re 60, 61, 62, and 63. 

Specifically, the 401(k) limit increases to the greater of $10,000, or 150% of the regular catch up amount in 2024. Again, keep in mind the Roth rule above. 

For SIMPLE IRAs, the limit jumps to the greater of $5,000 or 150% of 2025’s catch up amount.

Other Retirement Plan Updates

There are a number of other retirement plan updates to keep an eye on. 

Increased Retirement Plan Start-up Tax Credit – Starting this year (2023)

A retirement plan start-up tax credit is now allowed for up to 100% of start-up costs (up to other limits) if you have 50 or less employees. In the past, the credit was up to 50% of costs. 

Swap SIMPLE IRA with a 401(k) During the Year – Starting 2024

This is a cool one! In 2024 and beyond, you can switch a SIMPLE IRA plan with a 401(k), as long as it’s a safe-harbor 401(k) plan with mandatory contributions from the practice. 

You used to have to wait until the next calendar year to make the switch and meet a hard deadline to notify employees. Just keep an eye on the combined limits between the two plans! 

Profit Sharing in SIMPLE IRAs – Starting 2024

You can now make profit sharing contributions into a SIMPLE IRA plan in addition to the usual employer match! This used to be a missing feature in SIMPLE IRA plans, and it comes with limits:

Up to the lesser of

  • 10% of employee compensation, or
  • $5,000 per employee, per year

This will get you a bit closer to 401(k)s in terms of amounts you can contribute, and you’ll need to keep in mind all employees in the plan. 

SIMPLE IRA Contributions Limits Increase for 25 or fewer EEs – Starting 2024

Speaking of…If your practice has less than 26 employees, SIMPLE IRA contribution limits will increase by 10% starting in 2024! Special rules apply if 26 or more.

Sole Proprietors Have More Time to Open and Fund Solo 401(k) – Starting this year (2023)

If you are taxed as a sole proprietor – such as an independent contractor or with consulting work – you can now open a Solo 401(k) after the new year and fully fund it before the April tax deadline (not including extensions). This begins with 2023’s contributions. 

This includes “employee” and “employer” contribution amounts, and puts the Solo 401(k) at a major advantage to SEP IRAs.

Matching Student Loan Payments – Starting 2024

Practices can make matching contributions to an employee based on their student loan payments, as if they were contributing to the retirement plan. It’s a nice perk to attract and retain talented team members. Talk with your plan administrator about amending the plan. 

Required Auto-Enrollment – Starting 2025

Beginning in 2025, 401(k) plans will be required to automatically enroll employees into the plan once eligible. However, practices with 10 or less employees are exempt. 

Part-Time Employees  401(k) Eligible in 2 Years – Starting 2025

If you have part-time team members and have designed your 401(k) plan to limit eligibility to full-time employees, keep this in mind. Employees with 2 or more years with at least 500 hours of service are required to be eligible. This starts with the plan year 2025. 

The original SECURE Act had already lowered this to 3 years of service starting 2024, which will be in effect until the new rule kicks in a year later.

Entice Employees to Participate in Your 401(k) – Starting This Year (2023)

Last, and maybe least, you can now entice employees to participate in your 401(k) with “de minimis financial incentives”. Think of this as, if they sign up for or increase their 401(k) percentages, the next Starbucks is on the house. 

The List Goes On….

Phew! You made it to the end! We’ve touched on some of the more pressing topics for practicing ODs and practice owners, but we’ve barely scratched the surface. Other things you’ll want to keep an eye on but I won’t go into detail on today:

  • Required Minimum Distributions pushed back to age 73 (if you turn 73 this year or later) or age 75 after 2033. The language in the law is wonky, so expect to see this clarified. 
  • The amount you can donate to charity through Qualified Charitable Distributions (QCDs) will increase with inflation starting 2024. For when you’re 70 ½ or older.
  • A new option for Surviving Spouses with how to treat an inherited retirement account starting 2024.
  • A new “Emergency Savings Account” linked to 401(k) accounts starting in 2024.
  • A list of new ways to withdraw retirement plan dollars to avoid the 10% penalty. 
  • IRA Catch-Up contributions will increase with inflation starting 2024.
  • Creation of a “lost and found” database for old retirement accounts, within two years of the law’s passing.
  • And more…

There’s no single new rule that has a substantial impact on all optometrists. But we may have a few more planning opportunities – and extra complexities – to keep an eye on. 

Keep in touch with your professional team to see what matters to your specific situation, especially if you are a practice owner with a retirement plan in the practice.

Check out the graphic below, summarizing which rules come into play and when. Let me know if you have any questions! 

All the best, and I wish you a happy, healthy, and prosperous 2023!

 

 

Evon Mendrin
Evon Mendrin, CFP®, CSLP®, is a Certified Financial PlannerTM Practitioner and the Finance Editor of the ODs on Facebook Finance Newsletter. Evon is the Founder and Lead Advisor of Optometry Wealth Advisors, a financial planning firm just for optometrists nationwide, and host of The Optometry Money Podcast. He loves to help optometrists navigate that critical intersection between personal and practice finances.

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