March 7, 2023

Dentists’ Retirement Planning Impacts Due to 2023 Tax Codes Explained

By Drew Hinrichs, CPA, CEO of Engage Advisors

When it comes to retirement accounts and the tax code, dental practice owners have to stay current on two different tracks. You need to be aware of changes in tax law that impact how you save for retirement, and if you have employees, you also need to stay current on changes that impact retirement benefits you may be offering. Given the tax code changes in 2023, here’s a few things to keep in mind.

Retirements Savings Adjusted for Inflation

Thanks to the highest rate of inflation in four decades, most retirement plan limits increased in 2023. For example, the limit on IRA contributions jumped from $6,500 in 2022 to $7,000 in 2023, while limits for employee contributions made to 401(k) plans, 403(b) plans and 457 plans increased to $22,500 from $20,500 in 2022, subject to plan documents and a variety of federal tax rules and restrictions.

Secure Act 2.0

In the final days of 2022, Congress passed the Secure Act 2.0 as part of a large spending bill. The original Secure Act was passed in 2019 for the purpose of improving retirement-savings opportunities for Americans, and the Secure Act 2.0 builds on that effort. The latest version contains 92 new provisions which are intended to promote savings, boost incentives for businesses, and offer more flexibility to individuals saving for retirement.

Catch-Up Provision

For dentists who feel like they’re behind on retirement savings, you have a chance to catch up. Secure Act 2.0 allows anyone who’s aged 50 and older to put more money into retirement savings than what is normally allowed for the year. The Act phases in the following provisions over the next few years.

In 2023:

If you have a 401(k), 403(b), or other qualified retirement plan, the catch-up amount increased to an additional $7,500 on top of the $22,500 annual federal limit in 2023.

In 2024:

For high wage earners, defined as making over $145K annually, catch-up contributions can no longer be made with pre-tax dollars. If you currently have a 401(k), or other retirement plan where you’re making pre-tax contributions, you will only be able to make the catch-up contribution to the Roth portion of your 401(k) plan. (See below for more about Roth accounts.) Also, beginning in 2024, catch-up contributions to IRAs will be adjusted for inflation in increments of $100.

In 2025:

For those aged 60-63, you’ll have even more ability to boost your catch-up contributions to your 401(k), or other similar plans. Starting in 2025, you’ll be allowed to contribute whichever of the following amounts is greater: $10,000 or 150% more than the applicable catch-up limit from the previous year.

Practice Owners Must Offer More Roth Options

The Secure Act 2.0 doesn’t make changes to Roth IRAs and still allows you to convert funds from a traditional IRA to a Roth IRA using the back-door approach. However, if you own a practice and offer a retirement plan to employees, starting in 2024, you’ll need to have a Roth option for any employees (aged 50 and older) who want to make catch-up contributions. To facilitate that change, the Secure Act 2.0 allows for small business owners to open and contribute to Roth SEP IRAs and Roth SIMPLE IRAs, which creates some parity between large and small employer plan options. This provision doesn’t kick in until 2024 but it will take a few months to make the necessary adjustments. If you have employees that are eligible, don’t wait until December to update your plan.

Unspent 529 Plans Can Be Contributed to Roth IRAs

If you have money in a 529 College Savings Plan that went unused, the Secure Act 2.0 allows you to roll the funds over into a Roth IRA. While this sounds great on the surface, there are a lot of qualifiers:

  • The 529 Plan needs to have been established for 15 years.
  • Any contributions you made to the plan for the prior 5 years won’t qualify for the rollover.
  • You are limited to the typical Roth contribution of $6,000 per year.
  • The aggregate lifetime contribution limit is $35,000.

Given the annual contribution limit, it would take 5-6 years to contribute the maximum allowed. If you have funds remaining in 529 accounts set up for your children or grandchildren, this provision allows you to assist them with their own retirement and income tax planning. Just expect to jump through a few hoops.

If you have questions about how changes to the tax code will impact your business and retirement planning, contact Engage Advisors.

Our team of dental CPAs  will make sure you are maximizing opportunities to build wealth and help you maintain a financially healthy practice.