Education | Dec 06, 2022
How Will Inflation Impact Your Retirement Plans in 2023
Nancy I. Kunz
CFP®, CPFA®, ChFC®, CLU®
CFP®, CPFA®, ChFC®, CLU®
Inflation impacts everyone. As inflation rises, it can create a mixed bag of winners and losers. Although there appear to be more losers than winners currently, many still stand to benefit. In particular, those who are collecting social security benefits and those looking to save more for retirement can benefit from higher inflation thanks to some maneuvering by the Internal Revenue Service and Social Security Administration.
2023 contribution limits for qualified retirement savings
Even though paychecks may not go as far in an inflationary environment, contributing to your retirement account remains essential, especially if you have access to an employer match. The benefits of tax-deferred retirement accounts will further improve next year, when the IRS will increase the amount Americans can contribute to their 401(k) plans by a record $2,000 in response to persistently high inflation. The increase will raise the maximum 401(k) contribution limit to $22,500 for 2023.
Exceptionally large increases to contribution limits from 2022 to 2023 are good news for savers who wish to maximize their retirement savings. In fact, next year’s adjustment marks the biggest dollar increase since the maximum contribution cutoff began its indexation to inflation in 2007, when the maximum amount allowed was $15,500. The new contribution limits for qualified plans such as 401(k)s, 403 (b)s, most 457 plans, and the federal government's Thrift Savings Plan are all tied to the headline CPI index. This measure of inflation showed prices rose 8.2% year-over-year in September, the largest increase in nearly four decades.
For those nearing retirement, changes made by the IRS present additional benefits. Specifically, beginning in 2023, retirement savers who are 50 or older can now save a combined $30,000 a year in their 401(k)s, between the new limit and an increase to $7,500 for catch-up contributions (up from $6,500). SIMPLE IRA (savings incentive match plan for employees) account holders can contribute a maximum of $15,500 in 2023, up from $14,000 in 2022. In addition, the catch-up contribution limit for employees aged 50 and over who participate in SIMPLE IRA plans will rise to $3,500, up from $3,000.
2023 IRA contribution limits
Changes will also go into effect for individual retirement accounts (IRAs). In 2023, the cap on the amount one can contribute to IRAs will be $6,500, up from $6,000 in 2022. The $1,000 catch-up contribution for those 50 and older will remain the same as last year, however.
Income limits for Roth IRA contributions will increase in 2023 as well. The income phase-out range for Roth IRAs will be between $138,000 and $153,000 for single filers and heads of household, up from between $129,000 and $144,000. The range for married couples filing jointly will be $218,000 to $228,000, up from between $204,000 and $214,000 in 2022. The phase-out range for married individuals filing separately remains at $0 to $10,000.
2023 Social Security COLA increase
For those who have already retired, the Social Security Administration has announced the highest increase since 1981 to the annual Cost of Living (COLA) adjustment for 2023. Benefit checks to more than 70 million people will rise 8.7% in 2023, a substantial increase even from the 5.9% adjustment for 2022. The COLA increase is an important feature that keeps retirees from being tied to a 'fixed income' regarding their social security benefits, making it easier to manage growing expenses. Notably, the COLA adjustment has only risen above 7% five times since its introduction in 1975.
While the impact of inflation has been painful for most citizens, there are still ways to take advantage of adjustments made for inflation by the IRS and Social Security Administration. Be sure to maximize your employer’s retirement savings plan, to the extent possible. Alternatively, make sure to contribute the maximum possible to a Traditional IRA, Roth IRA, or SEP. For specific details on each of these options, consult your investment advisor or reach out to our team at DBR & CO. Many of today’s issues aren’t typical, and investors and savers will need to be well-informed to take full advantage of possible opportunities.
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Chief Planning Officer
Nancy I. Kunz
CFP®, CPFA®, ChFC®, CLU®