A new year means new annual contribution limits for various types of retirement plans, and for 2023 a historically big cost of living adjustment for Social Security beneficiaries.
Here’s a quick look at the changes for 2023.
401(k) contribution limits spike
Back in October, the IRS announced 2023 contribution limits for tax-advantaged retirement plans and accounts, 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 401(k) and 403(b) 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.
The maximum amount a person can contribute to a 401(k) plan (between the participant and the employer) is $66,000 in 2023. This limit was $61,000 in 2022. The total contribution limit, including the catch-up contribution mentioned above, is $73,500 for 2023.
Notably, the recently passed SECURE 2.0 Act of 2022 adds a “special” catch-up contribution limit for employees 60 to 63 years of age, but that doesn’t take effect until 2025. The special catch-up contribution maximum for workers 60 to 63 years old is the greater of $10,000 or 150% of the “standard” catch-up contribution amount for 2024. The $10,000 amount will be adjusted for inflation each year starting in 2026.
Another SECURE 2.0 change starting in 2024 also requires all catch-up contributions for workers with wages over $145,000 during the previous year to be deposited into a Roth account. The wage threshold will be adjusted annually for inflation beginning in 2025 (rounded down to the lowest multiple of $5,000).
The limits are put in place to prevent more affluent workers from disproportionately benefiting from these plans, as higher-paid workers can typically afford to allocate more funds toward 401(k)s, IRAs and other plans.
Generally, 401k contribution limits apply to other defined contribution plans, including 403(b) plans typically used by nonprofit and educational workers, 457 plans used by local and state government employees, and the federal government’s Thrift Savings Plan.
HSA limits also jump
Way back 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.
HSA participants also must be covered under a high deductible health plan to be eligible for an HSA. For 2023, the health plan must have a deductible of at least $1,500 for self-only coverage or $3,000 for family coverage. Those minimums were $1,400 and $2,800 for 2022.
An HSA allows individuals to set aside pre-tax money to pay for out-of-pocket medical expenses such as copayments, deductibles, and other qualified expenses. These funds remain in the account and are not “use it or lose it” like other types of flexible savings accounts.
HSAs have long been attractive (if underutilized) for offering one of the best tax breaks in the entire tax code. They are uniquely triple-tax-advantaged, as contributions to the HSA reduce your taxable income; the earnings grow tax-free; and qualified withdrawals (used to pay qualified health care expenses) are tax-free.
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.
“Medicare premiums are going down and Social Security benefits are going up in 2023, which will give seniors more peace of mind and breathing room. This year’s substantial Social Security cost-of-living adjustment is the first time in over a decade that Medicare premiums are not rising and shows that we can provide more support to older Americans who count on the benefits they have earned,” Acting Commissioner Kilolo Kijakazi said.
Some other adjustments that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $160,200 from $147,000.
Increased payments to more than 7 million SSI beneficiaries begin on December 30, 2022.
SEE ALSO:
• 2023 401k Contribution Limits Released
• Inflation Sparks Big Jump in 2023 HSA Contribution Limits
• Historic 8.7% Social Security COLA Finalized for 2023