New retirement rules recently became law with Secure Act 2.0 as part of the 2023 federal budget. The new rules change how doctors can save for retirement, including more Roth options, new penalty exceptions, and later Required Minimum Distributions.
We wrote this article to help doctors understand what Secure Act 2.0 means for you, whether you’re in residency or fellowship, your first attending position, or much further in your career and closer to retirement.
New Flexibility with Retirement Savings for Residents and Fellows
Thanks to Secure Act 2.0, residents and fellows will now have more flexibility than ever in how to save for retirement and avoid penalties if you need to take your money out for an emergency.
Roth Matching Contributions
You may have the ability to receive matching contributions from your employer to grow your “Roth” accounts, building your Roth 401(k) or 403(b) while in residency or fellowship. After residency or fellowship, you could roll the money over into a Roth IRA.
If you choose to receive Roth matching contributions, you’ll pay taxes on the income now, but the money will be tax-free when you take it out in retirement. This can be a great opportunity if you’re in a low tax bracket while in residency or fellowship.
Unfortunately, you can only elect to receive a Roth match after you’re fully vested in your employer’s contributions. Depending on your plan, you may not be 100% vested until your final year of residency or your first attending position.
This part of the law is effective immediately, but your hospital may have to change their plan to allow this before you can receive Roth matching contributions.
Student Loan Matching Contributions
Starting in 2024, you may be eligible to receive matching contributions to your 401(k) or 403(b) by paying down your student loans.
That means you could get the full benefit of your employer’s retirement match without putting any money in yourself — allowing you to focus on paying down your student loans instead.
However, employers aren’t required to adopt this provision, so be sure to check with your hospital to make sure it’s offered.
It’s also important to note that this doesn’t start until 2024, so you’ll still need to contribute to receive your retirement plan matching contributions in the meantime.
While you should always plan to save your retirement accounts for their intended purpose, sometimes life happens. Under Secure Act 2.0, you have new options to avoid penalties for emergency withdrawals.
Starting in 2024, you’ll be able to take out up to $1,000 from a 401(k) or IRA for any “emergency personal expense distribution”. You can then repay the money for up to 3 years, and amend your tax return to get a refund for any income taxes you paid on the distribution.
Secure Act 2.0 also clarifies the rules for penalty-free distributions up to $5,000 which you can take within 1 year of a birth or adoption, which can now officially also be repaid for up to 3 years.
Lastly, starting in 2024 you also might have access to a new retirement-linked savings account which allows you to save up to $2,500. This is a highly flexible account which allows you to withdraw your contributions penalty-free in case of emergencies. When you change employers, you can roll the money over into a Roth IRA.
New Savings Options for Attending Physicians
As an attending physician with more dollars to put away, Secure Act 2.0 gives you plenty of new options to grow the Roth portion of your portfolio as listed below:
- Roth employer matching contributions: As noted above, you can now receive employer matching contributions to the Roth portion of your 401(k) or 403(b), as long as you’ve been working long enough to be fully vested in your retirement plan. Choosing the Roth option means you’ll pay taxes on your matching contributions now, but avoid taxes in retirement.
- 529-to-Roth transfers: Doctors saving for their children’s college no longer have to worry as much about having extra money left over. Starting in 2024, you’ll be able to transfer excess 529 money into a Roth IRA, subject to annual Roth IRA contribution limits and a $35,000 lifetime maximum.
- Roth SEP and SIMPLE IRA: Self-employed doctors can now make “Roth” SEP or SIMPLE IRA contributions. Before Secure Act 2.0, these were only allowed to be “pre-tax” retirement accounts.
Keep in mind that Roth contributions may not be the best option if your current tax rate is higher than your future tax rate during your peak earnings years. Still, it’s great to have the flexibility to make Roth contributions when you want to.
New Rules for Doctors Approaching Retirement
For doctors closer to retirement, there are a few more easter eggs to help you put more money away, tax-free or tax-deferred:
- Roth catch-up contributions: Starting in 2024, catch-up contributions to your work retirement plan at age 50+ must be Roth if you earned more than $145,000 in the previous year. If you’re age 50 or over, this is the extra money you can contribute to your 401(k) or 403(b) above and beyond the “regular” limit.
- Increased catch-up contributions: Beginning in 2024, IRA catch-up contributions will be increased annually for inflation. This also means you’ll be able to make larger Backdoor Roth IRA contributions if you meet the age requirements for catch-up contributions (50+). Starting in 2025, you’ll also be able to make a larger catch-up contribution to your 401(k), 403(b), or SIMPLE IRA.
- Delayed Required Minimum Distributions (RMDs): Effective immediately, the age you need to start taking money out of your pre-tax IRA, 401(k), and 403(b) is now 73 (increased from 72). If you were born after 1959, you won’t need to start RMDs until age 75.
Wherever you are in your career, Secure Act 2.0 changes a lot that could impact your situation. Please don’t hesitate to contact us with any questions.