Like clockwork, the Internal Revenue Service (IRS) released cost-of-living adjustments (COLA) for tax brackets and IRA contributions for the coming year. Painfully high inflation for everyday goods is likely driving the extent of the changes, with the Consumer Price Index inching toward double digits in fall.1
In stride, the Social Security Administration also released their 2023 numbers for COLA, showing an increase in payments.
Here is a snapshot of the latest figures.
Social Security COLA
The 2023 COLA for Social Security rose a substantial 8.7% and will be applied to benefit payments for most recipients beginning in January 2023.2 This can be seen as a big relief for many seniors in this current economy.
The maximum Social Security taxable wage is increasing from $147,000 in 2022 to $160,200 in 2023. One credit is earned toward benefit eligibility, up to four in a calendar year, with $1,640 in earnings per credit.
Those claiming benefits before their "full" retirement age while still working will see their earnings test limit increase to $21,240 before benefits are withheld one dollar for every two earned from work. Similarly, the earnings test limit for people in the year of reaching their “full” retirement age in 2023 will also increase to $56,520.2 above which one dollar of benefits will be withheld for every three dollars earned over the limit.
Along with this substantial Social Security benefits increase, some Medicare costs will likewise change in 2023. For Medicare Part A, the premium, deductible, and facility stay costs will see a slight increase. Albeit minimally, the premium and deductible costs for Medicare B actually decreased.3
Increased 2023 Retirement Contribution Limits
Some retirement investment contribution limits saw significant increases for 2023. Contribution limits for employee participants in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan increased to $22,500, up from $20,500. Catch-up contributions for employee participants aged 50 and over increased to $7,500, up from $6,500. That means that those 50 and older can contribute up to a total of $30,000 to their employer-sponsored plan beginning in 2023.4
Traditional and Roth IRA contributions increased as well, up to $6,500 after remaining at $6,000 for several years. Additional catch-up contribution limits for those age 50 and over remain at $1,000 for 2023.4
Traditional IRA Income Limits
Traditional IRA contributions may be deductible from income taxes for those who meet certain criteria. Contributors who are not covered by a retirement plan at work, and do not have a spouse with an employer-sponsored plan, may be able to deduct in full up to their contribution limit. The following phase-out limits apply to those households covered by a workplace retirement plan.4
Traditional IRA Single Filers
For 2023, Single tax filers who are covered by a workplace retirement plan with Modified Adjusted Gross Income (MAGI) are subject to a deductibility phase-out range increased between $73,000 and $83,000. That’s a significant jump from the previous range between $68,000 and $78,000.4
Traditional IRA Married Filing Jointly
Married couples who file jointly also saw a significant increase in the deductibility phase-out range. Couples have a phase-out range for incomes between $116,000 and $136,000 when covered by workplace retirement plans. Combined income below $116,000 makes them fully deductible. These limits are up from the previous 2022 range between $109,000 and $129,000.4
If one spouse is covered by a workplace retirement plan, the non-covered spouse benefits from a higher deductibility phaseout range between $218,000 and $228,000, up from $204,000 to $214,000 in 2022.4
Married individuals who have a workplace retirement plan and file separate returns do not benefit from a COLA and the phase-out range remains between $0 and $10,000.4
Roth IRA Income Limits
Income limits also apply to someone’s ability to make contributions to a Roth IRA, and also saw an increase in 2023:
Roth IRA Single Filers
The contribution phase-out range for single filers and heads of household is between $138,000 and $153,000 for those contributing to a Roth IRA. Incomes within that range have prorated contribution limits. These limits are up from between $129,000 and $144,000 in 2022.4
Roth IRA Married Filing Jointly
The phase-out range for Roth IRA contributions of Married Filing Jointly investors increased to between $218,000 and $228,000, up from between $204,000 and $214,000.4
COLA Limits for Higher Earners
The aforementioned limits might make some higher earners feel left out. Small business owners, however, often have numerous employer plans with much higher contribution limits available to them.
A Simplified Employee Pension (SEP) IRA permits an annual percentage of income contribution up to $66,000, associated with maximum SEP-covered compensation up to $330,000 in 2023, up from $305,000 in 2022. An eligible, highly compensated employee may be provided significant contributions over the years to create a sizable SEP IRA balance.5
Savvy investors can, in a sense, create their own pensions by directing funds into products such as annuities with all the risk control and income guarantees their chosen annuity provides.
Just when you think you may have a grasp on the latest tax implications, investment contribution limits or eligibility parameters, things change. That’s why it’s important for your clients to consult a tax professional. During your client meetings, however, you can shed some light on how COLA 2023 limits may impact their retirement strategy. Use our easy reference guide on the new 2023 contribution limits below to help guide the conversation. Simply click the link below.
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™
Marshall is CUNA Mutual Group's Advanced Planning Expert and has more than 25 years experience in the insurance and financial services industry. He consults Financial Advisors on advanced retirement planning concepts for retirement and wealth management clients.
1BLS.gov, Consumer Price Index Summary, Oct. 13, 2022.
2SSA.gov, Cost-of-Living Adjustment (COLA) Information for 2023, no date.
3CMS.gov, 2023 Medicare Parts A & B Premiums and Deductibles 2023 Medicare Part D Income-Related Monthly Adjustment Amounts, Sept. 27, 2022
4IRS.gov, 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500, Oct. 24, 2022.
5IRS.gov, COLA Increases for Dollar Limitations on Benefits and Contributions, Oct. 24, 2022