Welcome 2023! Updates in Financial Planning
2022 has been a challenging year! We’ve seen markets hit lows with virtually every market segment falling in value, including bonds. Inflation skyrocketed, hitting rates the US has not seen in 30 years. The most recent Consumer Price Index numbers were released this morning, reflecting a 7.1% inflation rate for the United States through November1. This comes as reassuring news, as many economists were expecting higher numbers to close out the year. Albeit, 7.1% is still mighty high.
The Federal Reserve came out swinging in 2022, attempting to combat inflation with an extremely aggressive rate hike cycle. The Fed has increased interest rates a whopping six times so far in 2022. They meet one more time this year, December 13-14th, so it is likely we will see seven rate increases.
As 2023 moves in, we have several changes in IRS provisions and a substantial Social Security Administration COLA increase taking effect in order to help offset inflation. Several retirement plan contribution limits also increase. A couple of significant pieces of legislation are still up for debate that may impact your financial future. Let’s take a look at what 2023 has to offer:
IRS Tax Changes
The IRS recently released adjustments for over 60 tax provisions in response to the overwhelming inflation rates2. The two most notable changes impact standard deductions and marginal tax brackets. Changes for 2023 are outlined below.
- Standard deductions will increase across the board beginning in 2023.
a. Married filing jointly - standard deduction increases to $27,700
b. Single filers and Married individuals filing separately - increases to $13,850
c. Head of Household deduction - increases to $20,800
- Earnings thresholds for tax brackets have been adjusted. Marginal tax rates starting in 2023 are as follows:
- 37% for incomes over $578,125 ($693,750 for married couples filing jointly)
- 35% for incomes over $231,250 ($462,500 for married couples filing jointly)
- 32% for incomes over $182,100 ($364,200 for married couples filing jointly)
- 24% for incomes over $95,375 ($190,750 for married couples filing jointly)
- 22% for incomes over $44,725 ($89,450 for married couples filing jointly)
- 12% for incomes over $11,000 ($22,000 for married couples filing jointly)
- 10% for incomes under $11,000 (under $22,000 for married couples filing jointly)
Social Security Changes
The Social Security Administration recently released their annual cost of living adjustment (COLA) for 2023, increasing benefits by 8.7% in January 20233. This marks the highest increase in 40 years. They also made a number of other changes, including a maximum benefit increase for those retiring at full retirement age. The maximum increases from $3,345 to $3,627 in 2023. There is also an increase in the amount of income subject to Social Security tax for those still in their working years. The threshold was previously $147,000 and will increase to $160,200 in 2023.
2023 Contribution Limits
The IRS recently released a comprehensive list of 2023 contribution limit increases for retirement plans4. Here are the key updates. Be sure to adjust your payroll deductions as needed with your benefits department as soon as possible so changes can be implemented for 2023.
- The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan will increase to $22,500.
- The limit on annual contributions to an IRA will increase to $6,500. The IRA catch‑up contribution limit for individuals age 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000.
- The catch-up contribution limit for employees age 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan will increase to $7,500.
- The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500, up from $3,000.
- The phase‑out ranges for deducting contributions to a traditional IRA will also increase.
- The income phase-out range for people making contributions to a Roth IRA will increase for taxpayers filing as single, head of household and married filing jointly.
- The income limit for the Saver's Credit for low- and moderate-income workers is $73,000 for married couples filing jointly; $54,750 for heads of household; and $36,500 for singles and married individuals filing separately.
- The amount individuals can contribute to their SIMPLE retirement accounts will increase to $15,500.
Student Loan Forgiveness Status
Earlier this year, in perhaps one of his most controversial moves so far, President Biden announced his student loan forgiveness plan. The forgiveness applies to those with federal financial student loan debt, and would grant those eligible with $10,000-$20,000 in debt forgiveness5. This was not a well-received idea for many citizens and is currently on hold as courts determine if the forgiveness program is in fact constitutional. Federal student loan payments have yet again been deferred, as they have been since Covid, while the courts determine their stance.
SECURE Act 2.0
As a follow up to the 2019 SECURE Act, SECURE Act 2.0 has been a hot topic this year in Congress. The Act passed through the House earlier in 2022 and awaits Senate approval. You can view the act in its entirety here. It is unknown if the Senate will have time to address this Act before closing in 2022. If approved, some of the major changes impacting the average investor may include the following:
- Changes to start dates for Required Minimum Distributions: Proposed to increase the age to 73 beginning THIS year, then required start date for distributions would increase to age 74 in 2029 and age 75 in 2032. There have been other ages proposed as well, but nothing is final at this point with the legislation still being up for debate in the Senate.
- A substantial reduction in the penalty tax for failing to comply with RMD requirements. It is currently at 50% of the year's required distribution amount and would be changed to something in the range of 10-25%. Yet again, there have been different numbers tossed around and nothing is final at this point.
- Increases in catch up contribution limits to retirement plans for those ages 50 and over.
- Changes to qualifications for penalty-free withdrawals from retirement plans.
- Automatic enrollment in 401(k) plans for new employees, with automatic enrollment in payroll deducted contributions at a rate of somewhere between 3-10%, depending on many factors. The range here is still highly up for debate, and employees can choose to opt out.
New Year, New Plan!
As you move into 2023, take some time to reflect on your financial situation and goals for the upcoming year. 2022 has been a wild ride, and we can’t be sure what 2023 will bring us economically. But with the right planning and mindfulness, you can maximize your financial situation as you move into the New Year. As always, feel free to reach out to us here at FSG if we can help.
Written by: Kristin Prieur
Check out our handout on 2023 tax rates here.
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