Tax changes, RMD rules, Social Security COLA and more will affect older Americans’ finances
You might have heard about big changes coming to retirement finance due to Secure 2.0, a package of provisions included in the massive spending bill enacted by Congress and signed by President Joe Biden late last year. Among other things, Secure 2.0, which AARP supported, will broaden access to workplace savings plans and expand incentives for savers to contribute to retirement accounts.
Most of Secure 2.0’s key provisions won’t take effect until 2024 or beyond, but that doesn’t mean retirement finance is standing still in 2023. Changes to tax rules, savings plans, Social Security benefits and more will have an impact on older Americans’ pocketbooks in the here and now. Here’s a closer look at what’s in store.
1. Social Security payments
Inflation isn’t good for much, but it is providing Social Security beneficiaries with their biggest increase in monthly payments in more than 40 years. The 8.7 percent cost-of-living adjustment (COLA) raises the average monthly retirement benefit by $146, from $1,681 a month to $1,827.
The first retirement, disability and survivor benefit payments reflecting the increase go out in January. People receiving Supplemental Security Income (SSI), a Social Security–administered benefit for low-income people who are older, blind or have disabilities, got their first COLA-boosted payment Dec. 30.
The COLA is based on changes in prices for a set of consumer goods and services in the third quarter of 2022 compared to the same period the year before. Since hitting a 40-year high of 9.1 percent in June, inflation has cooled somewhat, dipping to 7.1 percent in November. If that trend continues, the new COLA will provide an especially strong buffer against higher prices, since the benefit increase is fixed at 8.7 percent through 2023.
2. Retirement plan contributions
Like Social Security benefits, contribution limits to individual retirement accounts (IRAs), 401(k)s and other savings vehicles get an inflationary bump in 2023.
If you are 50 or older, the amount you can put into an IRA this year goes up from $7,000 to $7,500. That includes the $1,000 catch-up contribution available to older savers; the limit for those under 50 is $6,500 (up from $6,000 last year).
People age 50-plus can contribute up to $30,000 this year to a workplace retirement plan such as a 401(k), 403(b) or (for federal government workers) Thrift Savings Plan. That’s a $3,000 increase from the 2022 cap. The contribution limit for younger adults goes up from $20,500 to $22,500.
Secure 2.0 includes multiple provisions to raise contribution limits in coming years. Starting in 2024, the catch-up contribution for IRAs, which has been stuck at $1,000 for several years, will be indexed to inflation, which could mean annual increases. From 2025, 401(k) catch-up limits will also be linked to inflation, and there will be a new, higher contribution cap for people ages 60 to 63.
3. Retirement plan distributions
One of the few Secure 2.0 changes taking effect this year involves required minimum distributions (RMDs) from retirement accounts. The new law bumps up the minimum age for starting those mandatory withdrawals from 72 to 73. (It will ultimately go up to 75, but not until 2033.)
RMDs are a fact of later life for holders of traditional IRAs, 401(k)s and most other types of retirement savings. (The exception is Roth IRAs, which are not subject to annual required withdrawals while the owner is alive.) The IRS uses a calculation based on the account balance and your life expectancy to determine the minimum you must take out in a given year; failure to do so can lead to hefty penalties.
Most people subject to RMDs must make their withdrawal for the year by the last day of that year. In your first year of eligibility, however, you have until April 1 of the following year. Thus, people who turned 72 in 2022 have an extra three months to take their initial RMD but must make their next by Dec. 31. Under Secure 2.0, from 2023 to 2033 that timetable applies to people turning 73 in a given year.
Another Secure 2.0 provision taking effect this year reduces the excise tax for failing to make your RMD in time. Previously, the penalty was 50 percent of the amount by which your withdrawal fell short of the required minimum. It’s now 25 percent and can be cut to 10 percent if you make good the full withdrawal and file a revised tax return in a timely manner.
4. Medicare costs
After a record-breaking leap in 2022, standard premiums for Medicare Part B come down a bit in 2023, from $170.10 to $164.90 per month. The decline is largely due to lower-than-expected costs for Aduhelm, a new Alzheimer’s drug that Medicare had initially projected would cost far more to cover.
Most Medicare enrollees have their premium payments for Part B, the portion of original Medicare that covers doctor visits and other outpatient treatment, deducted directly from their Social Security payments. For this group, the average net benefit — Social Security minus the Part B premium — increases from about $1,511 in December 2022 to $1,662 in January 2023.
The annual deductible for Part B is also declining, from $233 to $226.
Medicare enrollees who have Medicare Advantage (MA) coverage or Medicare Part D prescription drug plans may also pay slightly less in 2023. These plans are provided by private insurers so costs vary, but Medicare estimates that the average premium for an MA plan will drop from $19.52 to $18 and Part D plans will cost an average of $31.50 a month, down from last year’s $32.08.
5. Standard deduction
Most taxpayers take the standard deduction rather than itemizing on their tax returns. Married couples in that majority can take $25,900 off their taxable income for 2022, up from $25,100 the year before. For individual taxpayers, the standard deduction increases from $12,550 to $12,950.
You get a bigger standard deduction if you or your spouse is 65 or older: $1,750 more for a single filer and $2,800 for a couple filing jointly, up from $1,700 and $2,700, respectively, in the 2021 tax year.
6. Full retirement age
Congress voted in 1983 to raise the Social Security full retirement age (FRA) from 65 to 67 but opted to do so gradually — very gradually. Forty years on, the change is nearly complete, with FRA reaching 66 years and 6 months in mid-2023.
For the past few years, FRA — the age when you become eligible to claim 100 percent of the retirement benefit calculated from your lifetime earnings — has been going up two months at a time, based on year of birth.
For people born in 1956, FRA is 66 hears and 4 months. If you were born from September through December 1956, you will hit the milestone by the end of April this year. For those born in 1957, it’s 66 and 6 months; the first of that cohort will become eligible to claim their full retirement benefit midway through the year. FRA settles at 67 for people born in 1960 or later.
You can start collecting retirement benefits before FRA — the minimum age is 62 — but your monthly payment will be permanently reduced, by as much as 30 percent. You can also wait past FRA and be rewarded with a benefit increase: an extra 8 percent a year until age 70.
7. Social Security earnings test
Some retirees are only semiretired. If you claim retirement benefits before reaching FRA and continue working, your benefits may be temporarily reduced if your annual working income exceeds a set limit.
For 2023, that limit increases from $19,560 to $21,240 for beneficiaries who will not reach FRA until a future year. Social Security withholds $1 in benefits for every $2 in earnings above the cap.
If you will reach FRA this year, the income threshold is higher ($56,520, compared to $51,960 in 2022) and the withholding lower ($1 less in benefits for every $3 above the limit). The withholding ends in the month you hit full retirement age, and Social Security recalculates your benefit amount to make up for the prior reductions.