Q. I hear that Congress just passed the SECURE Act. What does that mean for doctors?
A. Most years, Congress passes a few rules that affect your taxes and retirement accounts. After the major changes that went into effect in early 2018, the changes this year (the SECURE Act) seem pretty minor. But part of your annual “continuing financial education” should be getting up to speed on changes like these. Let’s briefly go through them one by one.
There were five small changes to individual retirement arrangements (IRAs), although some of them also apply to 401(k)s.
The first change is that IRA owners can now delay taking required minimum distributions (RMDs) to age 72 instead of age 70½. This gives people one to two more years before they have to take money out of their IRAs and 401(k)s or else pay a penalty of 50 percent of what they should have taken out. This is a pretty minor change since 80 percent of people don’t even wait until age 70 to start tapping their IRAs.
The second change is that inherited IRAs can no longer be stretched indefinitely. Now you must withdraw all of the money from an inherited IRA within 10 years. Of course, you don’t have to take anything out for the first nine, which still allows compound interest to continue for almost a decade without interference from taxes. However, if you have large IRAs and “stretch IRAs” were a major part of your family wealth transference and estate plan, this could have a major impact on how much your heirs actually receive over decades. If you have a trust as the beneficiary of your IRA, you need to discuss this with your estate planning attorney now.
The third change affecting IRAs is that you can now contribute to them after age 70 if you are still working.
The fourth change is a new exception to the 10 percent penalty for withdrawing money from your retirement accounts prior to age 59½—the birth or adoption of a child now allows you to withdraw $5,000 from your IRA penalty-free. This is added to a long list of exceptions such as disability, a first home, medical expenses, and even early retirement via the substantially equal periodic payments rule.
The fifth change is that you can now use a stipend, such as a graduate student or military stipend, to contribute to an IRA (hopefully a Roth IRA at that income level).
There were also a number of changes that affect employer retirement plans such as 401(k)s.
The first of these is that annuities are now a bit more attractive to include in a retirement plan than previously. Your employer now has a “fiduciary safe harbor,” making it harder to sue them for including lousy annuities in their plan. Also, if the annuity option is removed from the plan by the employer, you no longer need to liquidate the annuity—you can roll it out of the plan “in-kind,” meaning you can move it to an IRA instead of selling it. It is probably still not a great idea to buy one of these, particularly inside a retirement plan.
The second change is a tax credit of up to $5,000 for establishing a retirement plan for a small business. Employers are even allowed to start a plan after the end of the calendar year, as long as the plan only accepts employer contributions. That could allow a lot of procrastinating independent contractor physicians to still make profit-sharing contributions for the previous year.
A third change is that employers can automatically enroll you at a contribution level of up to 15 percent of your income, an increase from the prior limit of 10 percent. This will help people save more money than they otherwise would. Studies show that opt-out plans are much more effective than opt-in plans. There is even another $500 tax credit for employers that add an automatic enrollment option.
A fourth change is that part-time workers are now more likely to qualify for a 401(k)—although it will likely be several years before that benefit really kicks in. Someone who works at least 500 hours a year for three consecutive years (or 1,000 hours in one year) now must be covered.
A fifth change makes things easier for multi-employer plans, allowing multiple small employers to band together for some economies of scale, lowering the costs of running the plan.
529s can now be used to pay off student loans, at least up to $10,000 per student. This could potentially allow you to make a 529 contribution, get a state tax deduction or credit for it, and then immediately withdraw the money and pay off student loans.
Kiddie Tax Change
For one brief year, the kiddie tax brackets (ie, the tax on unearned income for minors above $2,200) was equal to the trust tax brackets. It now reverts to previous law where it is equal to the parents’ tax bracket.
These changes are all relatively minor. The most important thing is simply to know what “the rules” are so you can “play the game” to the best of your ability.