The IRS announced 2023 contribution limits for tax-advantaged retirement plans and accounts on Friday, including a major COLA inflation adjustment.
The adjustment is so significant that The Wall Street Journal, citing Milliman, noted that it’s the “largest increase ever in terms of dollars and percentage,” just under an unprecedented 10%.
The $2,000 increase will raise the 401k and 403b contribution limit from $20,500 to $22,500, and the catch-up provision for participants aged 50 or over will increase from $6,500 to $7,500, totaling $30,000 in employee contributions alone.
Annual IRA contributions increased to $6,500 from $6,000, and the catch-up provision remained unchanged at $1,000.
Inflation’s effects
The announcement comes as lawmakers and other government agencies grapple with historically high inflation. Defined contribution plans were largely introduced in the 1980s, yet lower inflation in the ensuing years made increases and adjustments of this size unnecessary.
Earlier in October, the Social Security Administration said beneficiaries will receive a historically high 8.7% 2023 cost-of-living adjustment, meaning benefits to more than 65 million Americans will increase by more than $140 per month starting in January. Specifically, the average monthly retiree benefit of $1,656 will increase by $144.10.
In May, the IRS said that for the calendar year 2023, the annual inflation-adjusted limit on HSA contributions for self-only coverage would also jump be $3,850, up from $3,650 in 2022. The HSA contribution limit for family coverage will be $7,750, up $450 from $7,300 in 2022. The adjustments represent a 5.5% percent increase over 2022 contribution limits, almost a five-fold increase compared to the 1.4% increase between 2021 and 2022, which amounted to $50 for individuals and $100 for family coverage.
People 55 or older at the end of 2023 can put in an extra $1,000 in “catch-up” contributions, which is the same amount allowed in 2022.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.