Alert - IRS Announces Record Increases to Plan Limits for 2023
On October 21, 2022, the Internal Revenue Service in Notice 2022-55 announced record-setting cost-of-living adjustments (COLA) for the retirement plan limits effective on January 1, 2023. The good news for savers came as no surprise due to a significant rise in the cost of living as measured by the Bureau of Labor Statistics (BLS) Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the period covering the third quarter of 2021 to the third quarter of 2022.
Annual maximum defined contribution/SEP IRA contribution and maximum plan compensation increased to $66,000 and $330,000 respectively, with the SEP IRA eligibility compensation threshold nudging up to $750. Defined benefit maximum rose to $265,000, and the elective deferral for 401(k), Roth 401(k), 403(b), Roth 403(b), and 457 plans was increased to $22,500. SIMPLE IRA deferrals ticked up to $15,500. Catch up amounts for qualified retirement plans also increased – they will be $7,500 for those age 50 or older in 2023. For the SIMPLE IRAs, the catch-up amounts will increase to $3,500. Generally, the salary deferral limits increase in $500 increments while the annual additions limits are adjusted in $1,000 increments; the 2023 adjustment is 4x the norm for salary deferrals (except those applicable to SIMPLE IRAs) and 5x the norm for the total annual account contribution maximum. Catch up amounts for Traditional and Roth IRAs are fixed by law and remain unchanged; contribution limit to IRAs however stepped up to $6,500.
On October 13, the Social Security Administration announced an 8.7% cost of living increase, largest since 1981, boosting the annual benefit by $1,681 on average. For comparison, 2022 COLA was 5.9 percent. It was just 1.3 percent in 2021, 1.6 percent in 2020, and 2.8 percent in 2019.
The maximum amount of earnings subject to the Social Security tax, known as the Taxable Wage Base, will jump by $13,200 from $147,000 to $160,200. This will result in a monthly $84.15 payroll tax increase year-over-year for those with earned income at or above the limit.
Among other notable changes is the amount individuals under full retirement age may earn before experiencing decrease in their Social Security payments. The 2023 retirement earnings threshold increased from $19,560 to $21,240; after that, $1 of benefits is deducted for every $2 earned above $21,240. This income limit does not apply to pensions, investments, or other forms of unearned income. The full retirement age increased to 66 and 6 months in 2023 for those born in 1957. The earnings limit for those reaching the full retirement age will increase to $56,520. For each $3 earned over this amount for months prior to reaching the full retirement age, benefits will be reduced by $1 in 2023. Amounts foregone due to excess earnings are restored later in the form of higher monthly benefits at full retirement age. The earnings limits do not apply once the full retirement age is reached, which has been gradually increasing to 67, based on the birth year.
This summary is designed to provide an overview of the dollar limitations for retirement plans applicable in 2023 and is not comprehensive. It is intended for general information only and is believed to be accurate and reliable as of posting date but may be subject to change. For a complete announcement of the applicable limits see IRS Notice 2022-55 and Social Security Administration’s 2023 Social Security Changes Fact Sheet.
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