
Inflation Spike Helps Retirement Plan Funding
November 15th, 2022 by Jim AllenThe inflation spike caused by COVID and the associated economic stimulus packages from the government, plus the war in Ukraine, has created major pain in the pocketbook for most Americans. However, there are a few positive developments springing from higher inflation. Many of them are related to saving for retirement and estate planning as the IRS has just released the 2023 cost of living increases for retirement plan contributions.
One of the biggest pluses is that 2023 will see the largest Social Security benefit increase in almost 40 years. Social Security benefits are scheduled to increase by 8.7% next year. For a typical retiree earning $2,000 a month, this means an increase of about $175 in their monthly Social Security check. As an added benefit for retirees, Part B base Medicare premiums are actually decreasing by $5 per month from $170 to $165.
Here are the major 2023 limit changes for next year:
· 401(K)s and similar retirement plans: The salary deferral limit is increasing to $22,500. Those employees over 50 can make a catch-up contribution of an additional $7,500, thus raising their total contribution limit to $30,000.
· IRAs & Roth IRAs: IRA contribution limits are increasing by $500 to $6,500 for 2023. Those over 50 can add an additional $1,000 as a catch-up contribution making their limit $7,500.
· Social Security wage base: The maximum amount of employee wages subject to Social Security taxes next year is increasing to $160,200. Once over this limit, the 6.2% Social Security tax is not withheld. However, this limit does not apply to the 1.45% Medicare tax.
· 2023 Standard Deduction for income taxes: The 2023 standard deduction is increased to $27,700 for married filing jointly (from $25,900) and $13,850 (from $12,950) for single filers. Most people will not itemize unless their deductions add up to more than these amounts.
· Gift Tax Annual Exclusion: The annual gift exclusion for next year increases to $17,000 per person. This means that an individual can give a current to gift of up to $17,000 per person (to as many people as they wish) without any gift tax consequences.
· 2023 Estate & Gift Tax Exemption: The unified gift and estate tax exemption for next year is $12,920,000 per person. For married couples the combined exemption is $25,840,000. Unless your next worth exceeds the exemption amount, you will not need to worry about gift or estate tax. Please note that this exemption is scheduled to “sunset” at the end of 2025 and may revert back to about $6,500,000 per person.
These changes, along with continued higher than average inflation, will be incorporated into your financial and tax planning for next year. As always, if you would like to discuss, please don’t hesitate to contact us.
Jim Allen, CFP, ChFC, EA, CDFA is President and Chief Financial Planner at Anchor Bay Capital. In addition to his 35+ years of financial planning experience and his professional credentials, he holds a master’s degree in Financial Planning and is a former instructor in the CFP program at the University of California Irvine. He is also the co-author of the book “The Tools & Techniques of Charitable Planning.” Jim can be reached at [email protected]