2023 Milestones Letter

We hope this letter finds you well as you prepare for the holidays.

As we close the books on 2022, we are sending our annual year-end newsletter, highlighting contribution limits and age milestones which may present planning opportunities for 2023.

We realize there is a LOT of information below. Not everything will be relevant to each individual or family. We recommend giving it a read and highlighting items relevant to your personal situation.

Common Contribution Limits:

Traditional & Roth IRA’s – increasing to $6,500/yr; catch up contribution of $1,000/yr for those age 50 and older

  • The income phase-out range is also increasing for Traditional and Roth IRA’s. You can make a full contribution if your adjusted gross income (AGI) is under $138,000 for a single tax filer and less than $218,000 for married filers.
  • Conversely, if you are a single filer and make more than $153,000 AGI, or married making more than $228,000, you cannot make any contributions to a Roth IRA.
  • The limits to traditional IRA contributions only apply if you or your spouse participate in an employer sponsored retirement plan. If you fall between those income limits, you may be able to make a partial contribution to your Roth or Traditional IRA. If you or your spouse do not participate in an employer sponsored retirement plan, there are no income limits to making a traditional IRA contribution.
  • For Traditional IRA’s, the deductible amount from your income is complicated depending on whether you or your spouse are covered under an employer-sponsored plan, as well as your income level. Consult your CPA for specifics.
  • To take tax and penalty free distributions on gains in a Roth IRA, the account must be opened for at least 5 years, and the owner must be at least 59 ½ unless it is a qualifying withdrawal (first home, qualified education expenses) and even then, the withdrawals may be limited.

401(k) Plans – increasing from $20,500/yr to $22,500/yr for 2023 and catch-up contributions increasing from $6,500/yr for those age 50 and older to $7,500/yr (same for Solo 401k, 403b, and governmental 457b plans).

SEP IRA’s – for self-employed individuals, the total amount you can contribute to a SEP IRA is limited to 25% of employee compensation up to $66,000 for 2023 (up from $61,000 in 2022).

Solo 401k’s – The same contribution limit that applies to SEP IRAs applies to the Solo 401(k) but the Solo 401(k) includes a catch-up contribution for those age 50 and above, in the amount of $7,500/yr (up from $6,500 in 2022).

Defined Contribution– increasing from $61,000/yr to $66,000/yr for 2023.

SIMPLE IRA’s – The contribution limit on SIMPLE retirement accounts is increasing to $15,500 for 2023, up from the 2022 limit of $14,000. The SIMPLE catch-up limit is increasing to $3,500 for those reaching the age of 50 in 2023, up from $3,000 in 2022.

HSA’s – The annual limit on deductible contributions for individuals making HSA contributions is increasing from $3,650 to $3,850. The annual limit for families is also increasing from $7,350 to $7,750. For contributors aged 55 and above, a $1,000 catch-up is available. To participate in an HSA an employee must be in a High Deductible Health Plan (HDHP). Deductibles for qualifying HDHP’s for 2023: $1,500 for singles, and $3,000 for families. Out of pocket maximums for HDHP’s for 2023: $7,500 for singles, $15,000 for families. Check with your employer health plan to determine eligibility.

Indiana Tax Credit for 529’s – The % of 529 contributions that may be used as a tax credit is staying the same at 20%. However, the maximum tax credit is increasing from $1,000 to $1,500 for joint filers in 2023. Therefore, you would have to contribute $7,500 to receive the max tax credit of $1,500 ($7,500*20%=$1,500).

Gifts – Each year, the IRS sets the annual gift tax exclusion, which allows a taxpayer to give a certain amount (in 2023, $17,000) per recipient tax-free without using any of the taxpayer’s lifetime gift and estate tax exemption (in 2023, $12.92 million). For married couples, this means that they can give $34,000/year per recipient beginning next year.

If one gifts an amount that is above the annual gift tax exclusion, that individual will use a portion of his or her lifetime gift tax exemption ($12.92 million in 2023). The gift and estate tax exemption are linked, meaning that the use of one’s gift tax exemption will reduce the amount one may leave at death estate-tax-free. If one makes gifts in excess of the annual gift tax exclusion, one must file a gift tax return, due April 15 in the following year, to report the gift and track the amount of the lifetime exemption that has been used.

*Note that although the IRS has announced the lifetime estate and gift tax exemption will increase to $12.92 million in 2023, that amount is set to be cut in half at the start of 2026.

Social Security Max Taxable Wage – The maximum annual wage amount at which employees pay a Social Security tax increased from $147,000 to $160,200. The rate remains the same at 6.2%.

Social Security Cost-of-Living-Adjustment (COLA) – For 2023, the cost-of-living-adjustment for Social Security and Supplemental Social Security Income (SSI) is 8.7%. This is a raise from 2022 and 2021, which were 5.9% and 1.3%, respectively. This is a positive; however, you may owe additional income taxes. For now, single filers who have combined income (AGI + tax-free interest and half of Social Security benefits) between $25,000 and $34,000 may pay taxes on up to 50% of their Social Security benefit, and for those above $34,000, up to 85%. Married filers who have combined income between $32,000 and $44,000 may pay taxes on up to 50% of their benefit, and for those above $44,000, up to 85%.

Standard Deduction – For married filing jointly, the standard deduction from AGI to reach taxable income is increasing from $25,900 to $27,700. Accordingly, it is increasing from $12,950 to $13,850 for single taxpayers, and from $19,400 to $20,800 for Heads of Household.

Retirement Plans/Small Business Owners may want to consider the following changes:

Pensions/Defined Benefit Plans – For 2023, the maximum annual benefit payable from a defined benefit plan is increasing from $245,000 to $265,000. Consult with an advisor for clarification of the eligibility rules to receive benefits found on the plan documents (typically begin as early as age 62 and no later than age 65).

Maximum annual compensation to participate in a company retirement plan – This amount is increasing from $305,000 to $330,000. This means that if an employer match is 4% of salary, and your salary is $400,000/yr, the match would be 4%*$330,000 = $13,200.

Highly Compensated Employees – The threshold that identifies an employee as highly compensated is increasing from $135,000 to $150,000. This means any employee who is paid more than $150,000 per year is considered “highly compensated”. An unexpected increase in highly compensated employees may trigger compliance-testing issues within the company’s retirement plan and should be reviewed by the advisor running the plan.

Age Milestones

Age 50 – You may increase your annual contribution to your 401k by $7,500, while those contributing to a Roth or Traditional IRA can add an additional $1,000 annually.  With retirement rapidly approaching, this offers a great opportunity to supercharge your savings. If you participate in a SIMPLE IRA, you can increase your contributions by $3,500.

Age 55 –If you are between ages 55 and 59 ½ and leave your job, the IRS rule of 55 may allow you to receive a distribution from your 401(k), Roth 401(k) contributions (not gains), or 403(b) plan after reaching age 55 without triggering the 10% early withdrawal penalty if your plan provides for such distributions. Keep in mind you will still pay ordinary income tax on the withdrawals (except for Roth contribution withdrawals), but this could help you bridge the gap until you are eligible to draw from IRA’s or Social Security.

Also at age 55, you may contribute and deduct an extra $1,000 to your HSA.

Age 59 ½ – At this point, you may withdraw money from your IRA’s, or employer-sponsored plans without paying the 10% penalty for being under age 59 ½.  While there is no penalty, the withdrawals will still be taxed as ordinary income (unless from a Roth 401(k) / Roth IRA or the basis from a non-deductible IRA). Keep in mind that no matter your age, a Roth must be open for at least 5 years to take tax and penalty free distributions on gains.

Age 60 – You may be eligible for Social Security Survivorship Benefits if you are a widow or widower.  If you are eligible, be aware that taking SS at the soonest eligible date will reduce your benefit by as much as 28.5%.

Age 62 – You are eligible for reduced Social Security, however, like survivorship benefits mentioned above, the amount will be permanently reduced by up to 25%. You will likely want assistance analyzing whether taking Social Security early at a reduced benefit makes sense within the context of your overall financial plan, health, etc.

If you choose to take Social Security early, you can earn up to $21,240 a year without impacting your benefit. For any earnings over that amount, you will have $1 in Social Security withheld for every $2 you earn. In the year you reach your FRA (full retirement age) you can earn up to $56,520 without any impact to your benefits.  If you do earn more than $56,520, you will have $1 in Social Security withheld for every $3 you earn.  However, your benefit is not lost. The money they withhold gets calculated for future benefits.  It is also worth noting that once you attain FRA there are no limits on your earnings.

Age 65 – Medicare is now part of your overall health care decision.  You are given a 7-month window to enroll (3 months prior to your 65th birthday, the month of your birthday, and 3 months following that month).

If you happen to be contributing to a Health Savings Account, you are no longer able to do so.  The upside is that you can take money from the Health Savings Account for any reason without penalty.  Distributions from HSAs used for eligible medical expenses will be tax-free including things such as Medicare premiums, nursing home, etc. HSA funds cannot be used to pay for Medigap premiums. Taxes may apply if distributions are used for other reasons.

It is also important to consider the numerous Medicare Supplement plans that are available.  While choice is generally a good thing, there can be a lot of confusion as to the type of coverage you need, and the costs involved.  If you do not feel you have the expertise to make an informed decision, we can put you in contact with a trusted expert and/or resource who can assist you.

Aside from Medicare being an important milestone, any Disability Income policies should be reviewed if you are still working (or if you are collecting benefits).  Many benefits will stop paying at age 65 and coverage generally ends at that time.

Age 67 – This is considered full retirement age (for individuals born after 1959) and you are entitled to your full Social Security Benefit at this point.

 If you were born in: Your Full Retirement Age
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months

If you are still working, or do not need the income, it’s worth analyzing whether you should begin taking benefits since taxation and increased benefits for waiting could be a factor in your decision.

For those who have not done so, we recommend reviewing your Social Security statement on an annual basis to determine if you were properly credited for social security wages and taxes paid. You can now create an online login at https://www.ssa.gov . Statements are now only mailed every 5yrs if you do not have an online login.

Age 70 – Even if you are still working, this is the age that will give you the maximum Social Security payout.  Benefits no longer accumulate at 8% per year after this point.

Age 70 ½ – Qualified Charitable Distributions (QCDs) are permitted from IRAs only (includes inherited IRAs, not 401(k)s). This means that you can make a direct rollover from your IRA to a qualified charitable organization tax and penalty free. This can ease the tax consequences of RMDs at age 72, so we recommend consulting with your advisor and CPA to make sure available opportunities are taken advantage of.

Age 72 – While age 59 ½ allows you to access your IRA penalty free, age 72 means you must start taking Required Minimum Distributions (RMDs)from your retirement accounts such as IRA’s and 401K’s (no need to take from your Roth IRA).  There is some flexibility with regards to your first distribution, but we recommend you talk with us and your tax advisor to make an informed decision.  If you are charitably inclined, there are some planning techniques that can be incorporated with this distribution as well.

If you were already taking your RMDs based on age 70.5 prior to the law change in December 2019, this age 72 does not apply to you. You will remain on your existing RMD schedule.

If you are still working for the company sponsoring the plan when you turn 72 and do not own more than 5% of the company, you may be eligible to delay RMDs as long as you are employed. However, once you leave that company, you must start taking RMDs.

Note on Beneficiary / Inherited IRA’s: Passed in late 2019, The Secure Act altered both the RMD age requirements (mentioned above) as well as newly inherited Beneficiary IRA’s. This new law does not impact the ability of spouses to inherit an IRA and “stretch” that IRA over their lifetime. However, other than a spousal IRA, an IRA inherited from a grandparent, parent, etc. will now have different rules. Rather than allowing the individual to stretch that IRA over their lifetime, the government mandates it be taken in full within 10yrs. We are awaiting clarification from the IRS as to whether the new IRA owner will need to take mandatory annual distributions, while also adhering to the 10yr full-distribution rule. This can have multiple implications for planning, tax management, etc. We recommend discussing this with your financial advisor and/or CPA if you have questions.

As always, should you or your loved ones have any questions, please do not hesitate to contact LJI.

Best wishes for a Happy Holiday season and a safe and prosperous New Year!

Your LJI Team