2023 Cost-of-Living Adjustment (COLA) fast facts
January 11, 2023
As we embark on another new year, many have been curious about the cost of living adjustments (COLA) they’ll see for 2023. The Internal Revenue Service (IRS) has made the updates available, and these adjustments have the marks of the current inflation crisis all over it.
Let’s get right into the latest COLA and what potential impacts they may have for your clients and plan participants.
Social Security COLA
The 2023 COLA for Social Security rose 8.7% — significantly higher than usual — and will apply to benefit payments for most recipients starting January 2023.1 The maximum Social Security taxable wage also receives a significant hike, rising to $160,200 in 2023.1
Anyone eligible who’s claiming benefits before their "full" retirement age while still working will see their earnings test limit increase to $21,240, with $1 of benefits deducted for every $2 earned over $21,240.1 Along those lines, the earnings test limit for people in the year they reach their “full” retirement age in 2023 will rise to $56,520, with one dollar of benefits withheld for every three dollars earned over that limit.1
Medicare also sees certain cost changes going into effect in 2023 that many Medicare plan members are likely to appreciate. Let your clients or plan participants know that for Medicare Part A, the premium, deductible and facility stay costs will decrease slightly, as will the premium and deductible costs for Medicare B.2 This could provide a little relief for your clients or plan participants as they reach retirement or continue along their paths in this volatile economy.
2023 retirement contribution limits
The new year also sees some retirement investment contribution limit increases, which could help set clients up for better success in the future.
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 $20,500.3 Catch-up contributions for employee participants aged 50 and over increased to $7,500, up from $6,500, which means that those 50 and older can contribute up to a total of $30,000 to their employer-sponsored plan beginning in 2023.3
If you have clients or employees participating in traditional or Roth IRA plans, they may be happy to know that those contributions are increasing for 2023 as well, up to $6,500, with additional catch-up contribution limits for those age 50 and over remaining at $1,000.3
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.3
- Traditional IRA single filers: Those covered by a workplace retirement plan with Modified Adjusted Gross Income (MAGI) can expect a deductibility phase-out range between $73,000 and $83,000
- Traditional IRA married/joint filing: Couples covered by workplace retirement plans will have a phase-out range for incomes between $116,000 and $136,000; combined income below $116,000 allows them to be fully deductible
- If one spouse is covered by a workplace retirement plan, the non-covered spouse receives a higher deductibility phase-out range between $218,000 and $228,000
- 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
Roth IRA income limits
Anyone who is contributing to a Roth IRA sees income limits as well, and for 2023, those have also been increased.3
- Roth IRA single filers: Single filers and heads of household will now have a contribution phase-out range of $138,000 to $153,000, with prorated contribution limits
- Roth IRA married/joint filing: The phase-out range for joint/married filers has seen an increase in range — between $218,000 to $228,000
Are there COLA limits for higher earners?
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 2023.4 An eligible employee receiving high compensation may be provided significant contributions over the years to create a sizable SEP IRA balance.
What this means for advisors and plan sponsors
This is essentially a new set of ranges and guidelines for those who receive Social Security payments and contribute to retirement plans — and it’s good news! These changes are not blind to how tough the financial situation has been over the last few years for many Americans, and it is poised to help retirees feel more comfortable in their finances.
Get the word out to all those you guide on their journey toward (or through) retirement. The contribution limit boosts in particular may inform some of the choices plan participants make regarding how much of their current paycheck they’re willing to part with in the name of a stable financial future.
Use our easy reference guide on the new 2023 contribution limits to help guide the conversation. Simply click the link below.
1 SSA.gov, Cost-of-Living Adjustment (COLA) Information for 2023, Undated
2 CMS.gov, 2023 Medicare Parts A & B Premiums and Deductibles 2023 Medicare Part D Income-Related Monthly Adjustment Amounts, Sept. 27, 2022
3 IRS.gov, 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500, Oct. 24, 2022
4 IRS.gov, COLA Increases for Dollar Limitations on Benefits and Contributions, Oct. 24, 2022