What Physicians Should Know about the SECURE Act 2.0

What is the SECURE Act 2.0?

Passed on December 29th, 2022, the SECURE Act 2.0 is a set of rules and regulations implemented to help Americans better financially prepare for retirement. In fact, SECURE stands for Setting Every Community Up for Retirement. In 2019, the first SECURE Act was passed, giving part-time workers eligibility to participate in an employer retirement plan, eliminating the maximum age for IRA contributions, and more. 

The second version builds on the first, changing requirements for Roth accounts, offering the possibility to incorporate student loan payment matches into employer contributions, and pushing the age limit for required minimum distributions. 

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How do these changes affect me as a physician?

Depending on where you are in your career, the requirements set by this new piece of legislation may impact the ways in which you plan and save for retirement. 

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Beginning your career

As a resident or newly practicing physician, the two main changes that may affect you most are both related to 401(k) matches. 

If you’re a recent medical school graduate and paying off your student debt is impeding your retirement planning, this new provision could benefit you. In 2024, employers will be able to match employees’ student loan payments into their 401(k) accounts. So, while you pay off your medical school loans, your employer may match part of those payments directly into your retirement account. This also applies to 403(b)s, government 457(b)s, and SIMPLE IRAs. However, it is not a requirement; it’s up to each employer to decide. 

Your employer may have offered you the option to open a traditional 401(k) or a Roth 401(K). A traditional 401(k) is a pre-tax retirement account, meaning the money you contribute is taken out of your paycheck before paying taxes, and when you withdraw in retirement, it will be taxed. If you have a Roth 401(k), you contribute after paying income taxes, so the money will not be taxed upon withdrawal in retirement. Until now, employer matches could only be made pre-tax. The SECURE Act 2.0 gives employers the option of offering taxable, immediately vested matches directly into their employees’ Roth 401(k)s. The same applies for 403(b)s and government 457(b)s. 

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Practicing

Whether you are an employee or an employer with your own practice, new provisions in the SECURE Act 2.0 may affect personal retirement planning for practicing physicians. 

Keep in mind that this act has no provisions that change or limit a Back-Door Roth or a Mega-Back-Door Roth.

If you invest or have invested in a 529 education savings plan for your children’s education, you now have more options with how to spend any remaining money in that account. After 15 years, 529 account owners are now able to roll up to $35,000 from their savings plan into a Roth IRA. 

For physicians over 50 years old contributing to an IRA, catch-up contributions are a way to contribute over the maximum yearly limit as you get closer to retirement. Each year, the limit for these contributions has been $1,000 over the regular limit. With the signing of the SECURE Act 2.0, the year catch-up contribution limit will be indexed for inflation, instead of being set at $1,000.

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As an employee

If you contribute to a Roth 401(k) with employer matching, your employer matches can now be taxable and contributed directly into your Roth 401(k). 

For those nearing retirement and making catch-up contributions to their 401(k)s, a new provision raises the maximum limit. The maximum catch-up contribution limit will increase from $7,500 to $10,000.

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As an employer

If you own a practice or business and employ people part-time, those employees can be eligible to use a 401(k) after two years of part-time work.

If your business offers a 401(k) plan to employees, another notable change in the SECURE Act 2.0 is that plans that begin in 2025 must automatically enroll employees with a minimum 3% contribution. 

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Nearing or entering retirement

Certain changes have been made to the Required Minimum Distribution age and a tax-smart gifting strategy  that could impact your financial planning as you near retirement, or are in retirement. 

The age for taking Required Minimum Distributions (RMDs) increased from 72 to 73 with the passing of the SECURE Act 2.0, meaning you have one more year now to leave the RMD amount in your traditional IRAs and 401(k).  In 2033, the minimum age will increase to 75. The 50% penalty for not withdrawing your yearly RMD has also decreased to 25%. In2024, RMDs will be eliminated for both Roth 401(k)s and Roth IRAs.

A Qualified Charitable Distribution (QCD) is a tax-smart gifting strategy for retirees over 70 ½  years old. Individuals who are inclined to give to charity could distribute  up to $100,000 annually from their IRA, replacing the RMD for that year. That limit will now be indexed to inflation, permitting larger QCDs. 

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While the SECURE Act 2.0 being signed into law probably won’t affect your day to day saving or retirement planning, a few of the 92 provisions will probably affect your general retirement plans, and it’s important to stay informed. To learn more about how this new piece of legislation may affect your retirement accounts as a physician, schedule a call with an Earned advisor.