As we approach 2024, the IRS has wasted no time revealing its latest retirement plan limit updates. Renowned expert Steve Levy, CPA and JD, teams up with host Jarrod Bridgeman to analyze these new limits and shed light on their implications for practice owners.
Announcer:
Hello everyone. Welcome to The Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances, and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.
Jarrod Bridgeman:
Hello and welcome to another episode of The Millionaire Dentist. I am your host, Jarrod Bridgeman. Casey Hiers is out right now. He is out shaking babies and kissing hands with some other docs and practice owners out there at the moment. So instead today I've got the legendary Steve Levy. He is a CPA and a JD, and we call him Pipes because of his wonderful voice. Steve, how are you?
Steve Levy:
Great. How are you, Jarrod?
Jarrod Bridgeman:
Doing well, Steve. I wanted to bring you in today. You are our tax guru, people come and worship at your feet kind of thing, like the Buddha. Today we wanted to talk about the retirement plan limits, and I'm assuming the changes or the IRS announced the changes already?
Steve Levy:
That's right. It was actually hot off the presses with just about a week ago, the IRS on its website had announced these changes.
Jarrod Bridgeman:
So this is for retirement plans and social security wage limits. Is that what that means?
Steve Levy:
Yeah, that's basically it.
Jarrod Bridgeman:
And I remember doing this last year, so this is almost a yearly type of thing?
Steve Levy:
It is. It's kind of based on inflationary considerations and also a lot of different factors that each year it gets changed.
Jarrod Bridgeman:
Is there ever a time where nothing's changed?
Steve Levy:
I don't think so.
Jarrod Bridgeman:
You don't think so. Okay. But it may be different things changing at different amounts. It's never quite the same.
Steve Levy:
That's right.
Jarrod Bridgeman:
That's right. Okay, so let me straight up off the bat ask you what are the new limits for the 401k deferrals?
Steve Levy:
Yeah, so from 2022 to 2023, we saw a pretty big jump. 2024, not as much of a jump from. From 22 to 23, jumped 2000 from 20,500 to 22,500. And the catch-up contribution, which is for those that are 50 and over, jumped from 6,500 to 7,500 between 22 and 23. For 2024, the jump isn't as big, so we're just looking at a $500 jump for the regular contribution limit from 22,500 to 23,000. And the catch-up contribution didn't change at all for those that are 50 and over. So it remains at 7,500. So combined if you're 50 and over, then you can contribute as a deferral of 30,500.
Jarrod Bridgeman:
Okay. Yeah, 500 does not seem like a lot compared to the 2000 from the year prior.
Steve Levy:
Right. And a lot of that is, like I said, inflationary considerations and also just sort of when you defer to your 401k, the IRS loses tax on that amount that you defer. And so maybe it's a tax preservation idea kind of across the board because anybody that participates in the 401k and is deferring, that's a lot of people. So they have to factor in everyone participating.
Jarrod Bridgeman:
So it's the 2024, so this will not come into effect until next year.
Steve Levy:
That's correct.
Jarrod Bridgeman:
Moving from, I don't know, January 1st?
Steve Levy:
Yeah, basically. On pays that happen in actual payments that happen for compensation.
Jarrod Bridgeman:
So don't rush out and throw another 500 bucks in there right now.
Steve Levy:
Right. If you get over the limit, it's kind of a headache to figure that out to undo that.
Jarrod Bridgeman:
Just take that 500 bucks and put it underneath your pillowcase or something.
Steve Levy:
Yeah, that'll be fine.
Jarrod Bridgeman:
All right. Cool. Go buy some lottery tickets.
Steve Levy:
Yeah, perfect investment.
Jarrod Bridgeman:
[inaudible 00:04:18] recommend that.
Steve Levy:
Oh yeah, that's our biggest... Throw it all in.
Jarrod Bridgeman:
I feel like for me it's only... It's like Christmastime. My grandmother used to get us scratchers in the stockings and it was always fun for the kids to do that. We'd always run around and brag. I think I won 50 bucks once. At 10 that was a big deal.
Steve Levy:
Right. If you get anything from those, it's pretty sweet.
Jarrod Bridgeman:
Those were several ninja turtle toys.
Steve Levy:
Excellent.
Jarrod Bridgeman:
So what does this mean? So when it comes to retirement planning compensation and their limits and what does the new limit for that?
Steve Levy:
So retirement plan compensation limits are basically a certain amount of compensation can be factored into the match that you're allowed to get from your company.
Jarrod Bridgeman:
Got it. So compensation is your company matching what you're putting in?
Steve Levy:
That's right.
Jarrod Bridgeman:
Or percentage of it.
Steve Levy:
Exactly. So the IRS sets the limit that can be considered for the match, whatever percentage they're matching. Anything above that retirement plan compensation limit you wouldn't get a match for, it would be kind of capped there. So for 2023, it actually jumped some, not as much as the jump between 22 and 23. From 22 it was 305,000, in 23 it jumped 25,000 to 330,000. And so for 24 it's at 345,000. So a $15,000 jump, pretty good. Not as crazy as the one from 22 to 23, and it's actually actually the exact same amount from 21 to 22.
Jarrod Bridgeman:
Okay. I guess this is where I may get confused on this. So on your own personal retirement plan, right now, you can do 23,000 a year if you're under 50?
Steve Levy:
That's right.
Jarrod Bridgeman:
So how is the company going to be able to match 345?
Steve Levy:
So what they do is typically they use, let's say 5% of your total compensation they can use as a match up to typically what you've deferred in your 401k deferral. There's usually a cap there. So kind of dollar for dollar potentially.
Jarrod Bridgeman:
So let's say you make, just for ease of use, you put in exactly 23,000. Your company could put in more than that. Let's say you're making 100,000, could they.... Or is it still just matching?
Steve Levy:
No, it's still up to what you defer generally for that.
Jarrod Bridgeman:
So basically over the last year from 23 to 24, we're looking at a 15,000 increase from 330 to 345K.
Steve Levy:
That's right.
Jarrod Bridgeman:
Okay. Let's go on to IRAs and their contributions. What are the limits for that one, the new one?
Steve Levy:
That has kind of been steady over time. There was a jump from 22 to 23 from 6,000 to 6,500, and from 23 to 24 it jumps another 500 to 7,000 per person. And the catch-up, there's always a catch-up for both 401k and IRAs. That catch-up has stayed at 1000 throughout time and it is staying again at 1000 for 24. Now IRAs are kind of a different story in that a lot of times if you also have a 401k plan, then you shouldn't expect to also get a deduction for a IRA contribution. There's kind of some overlap there. You can still put in an IRA contribution, but it won't be deductible, but it will factor in, let's say you cash out your IRA, you take out of it, it factors in into the potential taxation of the money that you take out.
Jarrod Bridgeman:
Okay. Do you find that usually if someone has a 401k, they don't tend to do IRAs?
Steve Levy:
Yeah, that's true. They may look to potential other retirement vehicles or maybe just contributing to your investment account, watching that grow.
Jarrod Bridgeman:
Okay. So what does the Social Security taxable wage base mean?
Steve Levy:
So that is the base that it's the limit that any person that has wages, that's the cap where it will stop withholding social security.
Jarrod Bridgeman:
So when I get my paycheck, there's that dash says social security with the X amount of dollars, there's a certain cap of how much they will take out?
Steve Levy:
That's right. So once you're at this taxable wage base, no further social security will be taken out, no further social security is assessed.
Jarrod Bridgeman:
Is that a dollar amount or is that a percentage amount?
Steve Levy:
So that's a dollar amount. So again, with inflation, it's grown over time and so... It also allows more money to get put into the whole social security pool.
Jarrod Bridgeman:
So this is really more about they've increased a way to take more money out of your income?
Steve Levy:
That's right. A lot of times what we see is people actually maybe don't notice once they've hit the taxable wage base, the max that, oh, I'm getting more take home all of a sudden, what's going on here? Well, you've hit it and you may have hit it every year. And so if you're setting your compensation at that retirement plan compensation limit, you're definitely going to hit that every year. So you're actually going to get, and it's 6.2%, you're going to get more take-home pay based on that 6.2% not being withheld from your wages. And so over time... It's like between 2022 and 23, there was a big boost, like everything else. From 21 to 22, it went up a little over 4,000. From 22 to 23, it went up a little over 13,000. And 23 to 24 is sort of in between that really. So in 23, it was 160,200, and in 24 it will be 168,600. So really 8,400.
Jarrod Bridgeman:
So really upwards of almost $170,000 a year can be taken out for social security?
Steve Levy:
Yeah, that's what you're going to expect the requirement is.
Jarrod Bridgeman:
So what's that level? How much, on average, how much would you have to be pulling in to hit that limit?
Steve Levy:
Well, if your compensation is set at 170,000 for the year, you're going to have... The bulk of that is going to be subject to social security, a little bit isn't. But let's say you're going to be at that 345,000, over half of your compensation is not going to be subject to the 6.2% social security. Now that's separate from Medicare, the 1.45%, that continues on beyond that 168,000. That doesn't stop. That doesn't get capped at any particular amount. So that'll continue on, but social security will stop.
Jarrod Bridgeman:
Also, I just realized with the retirement plan compensation limit, we had talked about 345,000. I was totally thinking backwards on that. The 345,000 is the income amount of the person. Not the amount matched by the company. That's where I was getting confused. Okay.
Steve Levy:
That's right. So you take like a 4% of 345,000 and...
Jarrod Bridgeman:
Anything over that doesn't get counted. It's still the 4% of that 345? Let's say you make 500,000 a year.
Steve Levy:
Right.
Jarrod Bridgeman:
Okay. Got it. Steve, that was awesome. Anything else you'd like to add? Besides if you have any questions about taxes and accounting, we're the people to email and call.
Steve Levy:
We are. And actually what we've been telling our clients is that the rates have been inflation-adjusted as well. Just regular federal income tax rates where more of the income has been pushed down to lower rates. So that's helpful. So what that means is if you have the same income between 23 and 24, you're going to have to pay less tax in 24. So a little inflation saver. It doesn't help with all the increased prices you've had to pay in the grocery store.
Jarrod Bridgeman:
But it's nice to hear at least one positive thing.
Steve Levy:
Something. Throwing a bone to...
Jarrod Bridgeman:
I mean, have you seen the cost of just ground beef at the grocery store now? It's insane.
Steve Levy:
It is insane. At least I'm hearing some deals on turkey dinners from different places, kind of stabilizing that. So that's helpful.
Jarrod Bridgeman:
So I mean, at some point I got to stop feeding my kids kibble and bits. That'd be nice.
Steve Levy:
Yeah, I'm sure they're pretty tired of it and maybe barking or meowing and things.
Jarrod Bridgeman:
Yeah, they did that before. Steve, I want to thank you so much for being here today and helping me figure out what this stuff means. Obviously, this is not my forte, and so that's why I come to you to help me out. Listen, if you want to learn how to master the business side of dentistry, don't forget, we have events coming up all the time. We're going to be in the Phoenix area in November. It's November now, isn't it?
Steve Levy:
It is.
Jarrod Bridgeman:
We're going to be in the Phoenix area very soon. Also, we'll be in Louisville, mid-December. Yes, we're going to be doing a really cool whiskey experience along with dental finance CE.
Steve Levy:
Sweet.
Jarrod Bridgeman:
Yes. So make sure you go to fourquadrantsadvisory.com/events and sign up. There is a $50 registration fee, but that is refundable if you show up because we don't like no-call no-shows. I heard dentists don't either.
Steve Levy:
Yeah, not so much.
Jarrod Bridgeman:
Yeah, that's terrible. So Steve, once again, thank you so much and we'll see you next week.
Steve Levy:
All right, thanks, Jarrod.
Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.
