New Year, New Retirement Numbers

Happy New Year!

I hope your 2025 is off to a great start! This year retirement plan participants have a bit of homework to do because of increased IRS limits. Below is a guide of what adjustments need to be made to make sure you’re on track to maximize the retirement tools at your disposal. Take a minute this weekend (especially my clients!) to adjust your payroll/retirement plans to make sure you're getting the maximum benefit this year!

SIMPLE IRAs

To calculate your max deferral rate simply take the max deferral rate shown above and divide it by your total expected income (salary + bonus if applicable but not distributions). For example, if I pay myself a salary of $100,000 and am under 50 years old it would look like this: $16,500 ÷ $100,000 = 16.5% deferral rate.

It’s important to consider total compensation so that you hit the maximum at the end of the year and not earlier. Maxing earlier could cause participants to lose out on the match the final paychecks of the year.

A quick compliance note on Simple plans that I see made a lot: Simple eligibility can extend as long as two years (the amount of time an employee has to be employed before they can participate) but every employee, part time, full time, any time who made more than $5k in the preceding two years is required to be eligible to participate.

401Ks

The same calculation applies here. If my total expected payroll contribution (again, NOT including distributions) is $100,000, I would calculate as follows being under 50: $23,500 ÷ $100,000 = 23.5% deferral rate.

Once again, use the calculation based on total expected compensation to max contributions. If you’re unsure, undershoot a bit—you can always defer more to catch up in December but if you max out contributions early, there’s usually no going back on the match.

SEP (self employed) IRAs

SEP IRAs don’t work with most practice owners but where they do they can work really well. SEPs are made based on pay (or net income of an sole prop/LLC not filing as an S) capped at 25% of income for all owners an employees. SEPs are required to benefit staff that make more than $5,000/year and have been employed 3 of the last 5 years, regardless of hours work. Because of this, SEPs tend to work well for practices that are new or have had high staff turnover and do require a bit of advanced planning.

SEP contributions are calculated after the calendar year is complete and should be done by your CPA. There are no catch-up contributions in a SEP.

Traditional and Roth IRAs

There can be some confusion about the role of traditional and Roth IRAs so it’s worth recapping a bit. A traditional (or rollover) IRA is tax deferred, meaning that usually money goes in pre-tax, creating a credit on a tax return, then is taxed like a paycheck when it comes out. Contributions that cannot be deducted are called "non deductible" contributions (explained below) and those are supposed come out tax free (note that it’s your responsibility to keep up with those which can be challenging over the years).

When are IRA contributions non-deductible? First, if you or your spouse participate and any kind of employer sponsored plan (401k, Simple, SEP, etc) it impedes your ability to deduct traditional IRA contributions. In some cases, spouses can take the deduction if household income is less than $126,000 (2025) and single tax payers can take a deduction if incomes are less than $79,000 (2025) with some phase out levels.

Not done correctly non-deductible contributions to a traditional IRA are not good—you’re essentially taking money you’ve already paid taxes on and having it taxed again when you withdraw it.

 A Roth, however, is funded with after-tax money that grows tax free forever. Roths are a great vehicle and I like to see everyone who can participate do so. To directly contribute to a Roth for 2025 your adjusted gross income (line 11 on your tax return) must be less than $236,000 for married filing jointly and $150,000 for single filers with some phase out levels. However, it is possible for some doctors to do what's called a backdoor Roth if you have no other pre-tax IRA money. Married filing separately tax payers cannot contribute directly to a Roth.

Roth versus traditional questions usually boil down to income, and as you might imagine many taxpayers don’t know where they fall in their AGI until tax time. Consequently, the deadline to contribute to these vehicles is April 15^th of the following year.

Funding kids Roths through payroll:

I saved the best for last for practice owners with children. One strategy I use with many clients is to put kids on payroll, have them work, pay fair market wages and use those wages to fund a Roth IRA. It’s a very nice tax strategy for high income owners and a flexible way to save for college.

Typically, kids need to be paid in such a way that they are withholding for Social Security and Medicare taxes (but not for every business structure), but don’t need to withhold not federal and state if they are below filing requirements. Please consult your financial advisor or CPA about correctly setting up this strategy if you want to pursue it.

Please note these salaries are clean, whole numbers and may amount in a tiny overfunding at the end of each year which can be easily rectified with a reversal. Additionally, if you are going to pay children they really need to be working for the practice. See a guide to doing this correctly HERE (this is from several years ago so please forgive any dated numbers) and ideas for employing kids HERE.

I hope this is a helpful guide to getting your retirement plans straight for 2023. As always if you have any questions don't hesitate to reach out of just reply to this email. Happy saving!

Natalie