Contained in a $1.7 trillion federal spending bill signed into law in December, the SECURE 2.0 Act aims to boost tax-efficient retirement plan investing by business owners and employees. The provisions include tax incentives that could help veterinary practices attract talent and retain valued associate veterinarians and staff members. It also significantly changes how 401(k) and similar retirement plans operate.

We encourage practice owners to discuss the SECURE Act (Setting Every Community Up for Retirement Enhancement) with a certified financial planner, tax adviser and retirement plan representative.

Many of SECURE 2.0’s provisions are effective immediately. However, others won’t kick in until 2024 or 2025.

We’ll highlight the provisions launching this year and preview a few noteworthy changes.

Required Minimum Distributions

The age at which you must start withdrawing retirement assets and paying taxes on them went from 72 to 73 as of Jan. 1. Beginning in 2033, it’s 75. The changes enable additional tax-free asset growth and potentially delay the required minimum distribution until you are in a lower tax bracket.

Rollovers From 529s to Roth IRAs

You worked hard on your practice, saved for retirement and your children’s education, and paid your taxes. Now you’re an empty nester with kids out of college. What if you didn’t spend all the money in their 529 college savings accounts? A new provision permits certain beneficiaries to roll over up to $35,000 from their 529 to a Roth IRA, all free of taxes and penalties.

The good news for parents or grandparents supporting 529 plans is that the new rule could provide additional flexibility for overfunded beneficiaries.

Limitations include:

• The 529 accounts must be open for at least 15 years.
• Any contributions within the past five years (and the attached earnings) are ineligible to be rolled over to a Roth IRA.
• The amount rolled over is capped each year.

Other Highlights

SECURE 2.0 contains more than 90 retirement provisions. Here are eight critical changes.

1. 401(K) TAX CREDITS

SECURE 2.0 expanded tax credits for employer-paid fees in startup 401(k) plans, such as for record-keeping and financial professional expenses. SECURE 2.0 also strengthened the existing credit by removing its percentage limitation for certain smaller employers. More significantly, it created a new credit that reimburses small businesses for some employer contributions.

Together, the two tax credits could make the adoption of 401(k) plans extremely cost-effective. Surprisingly, many practice owners do not maintain a retirement plan through their business. The upfront cost (typically $500 to $5,000) is often seen as a barrier, but the credit can wipe it out.

Pro tip: A tax credit is more valuable than a deduction. Think of a tax credit as a coupon, literally a dollar-for-dollar reduction of taxes owed. On the other hand, a deduction reduces the amount of taxable income.

2. ROTH OPTION FOR EMPLOYER CONTRIBUTIONS

Employers now can allow employees to take matching and nonelective contributions on a Roth after-tax basis rather than as a pre-tax. The employer may still claim Roth contributions as a deductible business expense. If an employee elects to treat matching or nonelective contributions as Roth, the employer contribution must be included in the participant’s taxable income. Earnings would be subject to standard Roth rules after that. Finally, employer Roth contributions must be 100% vested.

We expect this provision to get lots of attention, but it won’t be available immediately. Payroll companies and retirement plan record-keepers need to reprogram their systems. Look for the rollout in the second half of 2023.

3. STUDENT LOANS

Starting in 2024, employers can match student loan payments by using contributions to an employee’s retirement plan. As a result, employees won’t miss out on a match because they decided to pay down student debt instead of saving for retirement.

4. REQUIRED MINIMUM DISTRIBUTIONS

But for one minor exception, there are no mandatory minimum distributions by participants in 401(k), 403(b) or 457(b) Roth accounts starting in 2024. However, rules still apply upon the individual’s death.

5. REDUCED EXCISE TAX

Individuals who failed to take required minimum distributions from a retirement plan were subject to a 50% excise tax. However, effective this year, the excise tax is cut to 25%. The tax is further reduced to 10% in other specific cases.

Pro tip: Work closely with your certified financial planner and tax professional to ensure you take your distributions on time.

6. PLAN ENROLLMENT

Newly eligible employees must be automatically enrolled in most 401(k) or 403(b) plans starting with the 2025 plan year. In addition, they must contribute at least 3% of their pay, with automatic annual increases of at least 1% until the amount reaches at least 10%. Certain exceptions apply to governmental plans, small-business plans and employers in business less than three years.

While automatic 401(k) plan enrollment has been permitted for years, it’s always been voluntary for veterinary practice owners. Going forward, it will be mandatory.

7. HIGHER CATCH-UP AMOUNTS

The following guidelines apply to practice owners and employees ages 50 or older.

• In 2023, the catch-up amount is $7,500 in 401(k) and similar employer-sponsored retirement plans. SECURE 2.0 permits the cap to increase with inflation after 2023.
• Beginning in 2025, participants ages 60 to 63 can make catch-up contributions of $10,000 or 150% of the regular catch-up limit, whichever is greater. The amount also will be indexed with inflation.
• Beginning in 2024, catch-up contributions for participants who earn at least $145,000 must go into a Roth account. Since the contribution is pre-taxed, the federal government collects the tax revenue immediately.
• For personal IRAs (traditional and Roth), individuals over age 50 may contribute an extra $1,000. The amount will be indexed for inflation annually beginning in 2024.

8. QUALIFIED CHARITABLE DISTRIBUTIONS

Currently, anyone age 70½ or older can contribute up to $100,000 directly from an IRA to a qualified charity without recognizing any income on the donated amount. (It also can count toward a required minimum distribution.) The $100,000 cap is now indexed for inflation.

Individuals might end up in a lower overall tax bracket by making a qualified charitable distribution.

LEARN MORE

The SECURE 2.0 Act is a massive piece of legislation and requires time to fully unpack. But because many of its provisions are effective in 2023, now is an excellent time to consult with your team of advisers. However, if you’re a do-it-yourselfer, the complete 11,165-word document is at bit.ly/40YGO9v.