Consolidated Appropriations Act of 2023: New law brings retirement plan changes
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The Consolidated Appropriations Act of 2023, enacted on Dec. 29, 2022, includes the Secure 2.0 Act of 2022, which contains many provisions designed to expand retirement coverage, increase retirement savings and clarify retirement rules.
These provisions affect orthopedic surgeons and should be considered in planning for retirement.
Increased RMD age
Of significant interest is the increased age for required minimum distributions (RMDs). Prior changes raised the age from 70.5 years to 72 years. The new law increases the age for RMDs beginning at age 73 years for those born from 1951 to 1959 and to age 75 years for those born in 1960 or later. While the RMD beginning age has increased, account owners will still be allowed to take qualified charitable distributions (the distribution of retirement plan money directly to a qualified charity) at age 70.5 years. Also, the penalty for a missed RMD has been reduced from the current 50% to 25%.
A later beginning date for RMDs will allow taxpayers additional years for traditional retirement accounts to continue growing on a tax-free basis. It also means participants have more time to convert traditional retirement accounts to Roth IRA accounts. In addition, the new act eliminates RMDs for Roth 401(k)s and Roth 403(b) accounts beginning in 2024, so that Roth qualified plan accounts will have the same RMD treatment that Roth IRAs already have. For retirees who do not need plan distributions for living expenses, a Roth conversion may be an option. In planning, however, keep in mind that most non-spouse beneficiaries of both traditional and Roth accounts are subject to a 10-year distribution rule for any inherited IRAs.
529 plan to Roth IRA transfer
Beginning in 2024, taxpayers with 529 plan balances will be able to transfer those balances to Roth IRAs, although this provision comes with many restrictions. First, the Roth IRA account must be in the name of the 529 plan beneficiary and the 529 plan must have been maintained for 15 years or longer. Contributions to the 529 plan made within the previous 5 years (and the earnings on those contributions) are not eligible to be transferred. The lifetime maximum that can be transferred is $35,000 and the annual limit for a transfer is that year’s IRA contribution limit less any IRA contribution already made by the taxpayer in that year. Because the annual transfer amount is subject to the IRA limit, the beneficiary must have compensation income. These transfers are not subject to the income limitations that prohibit high-income taxpayers from contributing directly to a Roth IRA. However, it is not yet clear whether a change of the 529 plan beneficiary re-starts the 15-year period.
As an example, Smith is the owner of a 529 plan for his daughter Jane, who is aged 25 years. Dr. Smith opened the account when Jane was an infant. The account had more than was needed for Jane’s education and Jane has no plans for graduate degrees or further education. Jane has no siblings and currently has no children. If it is assumed the 2024 IRA contribution limit remains at the current limit of $6,500, Smith can transfer $6,500 in 2024 to Jane’s Roth IRA account assuming Jane has not made any IRA contributions in 2024 and Jane has compensation income. He can continue to transfer $6,500 per year (or the indexed IRA contribution limit amount at the time of the transfer) into Jane’s Roth account annually until he has transferred $35,000 into the account from the 529 plan. Jane’s Roth IRA will grow on a tax-deferred basis and she will be able to take tax-free distributions from the account after age 59.5 years.
Catch-up contributions guidelines
Beginning in 2024, taxpayers with wages that exceeded $145,000 in the previous year can only make catch-up contributions into a 401(k), 403(b) or a governmental 457(b) Roth account. This means the catch-up contribution will be made with after-tax dollars. This provision may not apply if there has been a job change because the $145,000 wage limit applies to the employer sponsoring the plan, per the text of the bill. This does not apply to IRA catch-up contributions, including SIMPLE IRAs.
The new law will also allow employer non-forfeitable matching contributions and non-elective contributions to be made to Roth accounts, effective immediately. This does not apply to profit sharing contributions. Previously, only an employee’s salary deferral contribution could be made to a Roth account. Beginning in 2024, catch-up contribution amounts will be increased for inflation for both IRAs and qualified plan accounts. SIMPLE and simplified employee pension account owners can now (beginning in 2023) make their contributions to Roth accounts, as well.
Assume Dr. Jones, aged 55 years, works for ABC Orthopedics in 2023 and makes $300,000 in W-2 income. In 2024, Jones wants to maximize her salary deferral into the ABC Orthopedics 401(k) plan, including a catch-up contribution. If we assume contribution limits remain the same, Jones can make her $22,500 salary deferral into a traditional 401(k) plan in 2024, but must add the $7,500 catch-up contribution to her Roth 401(k) account. Her $22,500 contribution will not be subject to income tax, but the $7,500 catch-up will be taxable income. However, if Jones changes jobs and works for XYZ Orthopedics in 2024, because she did not make more than $145,000 at XYZ Orthopedics in the previous year, she can presumably make both the $22,500 contribution and the $7,500 catch-up to the traditional 401(k) plan of XYZ Orthopedics. Jones will need to consider the tax diversification of her wealth in determining if she is better off making part of her contribution to her Roth account. Because Jones can now receive her 3% employer match from her employer into her Roth account, she could potentially add $39,000 to her Roth plan in 2024, significantly increasing her tax diversification.
Beginning in 2025, increased catch-up contributions to certain accounts will be allowed for individuals who turn the age of 60 to 63 years during the year. This will apply to 401(k) and similar plans, as well as to SIMPLE IRAs. For qualified plans, such as 401(k) and 403(b) plan, the additional limit will be 150% of whatever the regular catch-up amount is for a given year or $10,000, whichever is greater. For SIMPLE IRA plans, the additional limit will be 150% of whatever the regular catch-up amount is for a given year or $5,000 — whichever is greater. In addition, starting in 2024, all catch-up contribution limits will be indexed to inflation, including IRA catch-up contributions.
Employer provisions
The new law provides that employee student loan payments will be treated as elective deferrals for employer matching contributions beginning in 2024. Thus, employers can match payments that plan participants make to their student loans based on employee certification of student loan payments. Vesting and matching schedules must be the same as if the loan payment were an employee deferral into the plan. The premise behind this is that employees who cannot make 401(k) contributions because they are making student loan payments will not lose out on an employer match.
In addition, there are new Starter 401(k) plans for businesses that do not currently offer retirement plans effective in 2024. Starter 401(k) plans would include automatic enrollment and contribution limits that are equal to IRA contribution limits, but without an employer contribution.
While this article by no means addresses all the provisions of the 1,000-plus page Consolidated Appropriations Act of 2023, we have highlighted some changes that are most likely to affect orthopedists and other physicians. When planning for retirement and contemplating how these changes to the law will impact one’s retirement accounts, it is essential to understand how your current accumulated wealth will be distributed and taxed during retirement years. Experienced advisors can provide valuable guidance to help you build tax-diversified wealth for retirement and achieve your long-term financial goals.
- Reference:
- Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
- For more information:
- Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon practicing at Northwestern Medicine in Warrenville, Illinois. He can be reached at sanjeevbhatia1@gmail.com or @DrBhatiaOrtho.
- David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group, where Carole C. Foos, CPA, is a partner and tax consultant. They can be reached at 877-656-4362 or mandell@ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy discussed herein.
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