Agili Financial Strategist, Sarah Caine, CFP®, recently wrote an article delineating important financial planning considerations for 2023. Readers with subscriptions to Lehigh Valley Business have access to the article here.
The complete article is below in italics….
Increased Contribution Limits and Cost-of-Living Adjustments
In December, many people will be developing annual budgets and financial plans for the upcoming year. As we plan for 2023, there’s good news for those saving for retirement as well as for retirees themselves. Contribution limits have increased for many retirement saving vehicles and new cost-of-living adjustments for Social Security and Supplemental Security Income (SSI) recipients will take effect as of January 2023 and December 30, 2022, respectively.
From a “financial planning best practices” standpoint, it is a good idea to increase your retirement saving plan contributions – ideally to the new maximums allowed, but if that’s not doable, then by as much as possible. And if you’re a retiree who is fortunate enough to not be fully dependent upon Social Security income for your living expenses, below are some financial planning ideas for making the most of your increased benefit.
Increased Retirement Plan Contribution Limits in 2023
401(k), 403(b), 457, and TSP Contribution Limit Increases
So that workers can contribute enough to keep up with cost-of-living increases, the IRS announced nearly a 10% increase in the amount individuals will be able to contribute to their 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan in 2023. That contribution limit will be $22,500 next year (whereas it was $20,500 in 2022). The catch-up contribution limit for older employees, age 50 and above, will be $7,500 in 2023 (while it was $6,500 in 2022). It is recommended that workers take full advantage of the tax savings offered by these contribution limit hikes and automate higher contributions to these plans.
IRA Contribution Limit Increases
Those contributing to IRAs will be happy to learn that annual contribution limits will also increase – from $6,000 in 2022 to $6,500 in 2023. There is no cost-of-living adjustment (COLA) for the IRA catch-up contribution limit for those age 50 and above: That contribution limit continues to be $1,000.*
SIMPLE IRA Contribution Limit Increases
If you contribute to a SIMPLE retirement account, your contribution limit will increase from $14,000 in 2022 to $15,500 in 2023. For those age 50 and above, the catch-up contribution limit will increase from $3,000 in 2022 to $3,500 in 2023.
Increased Social Security and Supplemental Security Income Benefits
You’ve likely heard that 2023 will bring an 8.7% cost-of-living adjustment increase to the approximately 70 million Americans receiving Social Security and Supplemental Security Income benefits. This is the largest COLA jump in over 40 years. According to the Social Security Administration, “The purpose of the COLA is to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not eroded by inflation.” With U.S. inflation at 7.7% (as of October 2022) and many people feeling an economic pinch, this is a welcome development.
If you are fortunate enough to not be dependent upon Social Security income to cover all your retirement living expenses, the following are a few ideas about what you can do with some (or all) of your additional 8.7% income.
- Increase contributions to your investment accounts.
- Increasing investments will positively impact your retirement nest egg.
- Set up an automatic monthly transfer of funds.
- Add to your emergency fund.
- We recommend having 3-6 months’ income in a high interest money market account.
- Set up an automatic monthly transfer of funds.
- Gift the funds.
- Consider establishing a 529 college savings account for grandchildren, children, or family friends and contributing to it monthly. Accounts grow tax-deferred and withdrawals are free of federal and state taxes when the funds are used at eligible institutions. You may also get a state tax deduction for your contributions.
- Consider contributing to a favorite charity or charities on a monthly basis. Set up automatic charitable deductions.
All in all, 2023 promises to be an easier year for those dependent upon government programs such as Social Security and SSI. And those who are able to use the increased benefits in other ways would be wise to utilize at least some of the funds to improve their overall financial well-being.
*In addition, the income phase-out ranges for those contributing to an IRA in 2023 have increased. Please go to www.irs.gov for more specifics regarding income phase-out ranges.
Sarah Caine, CFP®, is a Financial Strategist whose responsibilities include analysis and development of comprehensive financial plans and assisting in their implementation and on-going execution. A graduate of Lehigh University and a Certified Financial PlannerTM, Sarah can be reached at firstname.lastname@example.org.