Today I’m sharing three retirement and tax planning updates for 2023.
Specifically, I’m sharing a summary of important changes to:
- Social Security payments
- Social Security taxation
- Medicare Part B premiums
I’m also sharing key highlights from the highly anticipated Secure Act 2.0 bill + when we might expect it to (finally) pass.
If you’re wrapping up your year-end planning and starting to think about 2023 and beyond, this episode is for you.
How to Listen to Today’s Episode
- Subscribe to the Stay Wealthy Newsletter! 📬
- Social Security Administration Resources:
- Summary of Social Security Changes Coming in 2023 [US News]
- Secure Act 2.0 Should Pass After November Midterms [FA Mag]
3 Retirement (and Tax Planning!) Updates for 2023
Taylor Schulte: Welcome to the Stay Wealthy podcast! I’m your host Taylor Schulte and today I’m sharing three big retirement planning updates for 2023.
Specifically, I’m sharing a summary of important changes to Social Security payments, Social Security taxation, and Medicare Part B premiums.
I’m also sharing an update on Secure Act 2.0, a couple of key highlights, and when we might expect it to officially be passed.
If you’re wrapping up your year-end planning and starting to think about 2023 and beyond, this episode is for you.
For all the links and resources mentioned today, head over to youstaywealthy.com/171.
The first update is likely one that has already crossed your desk but I wouldn’t be doing my job here as a retirement podcast host if I didn’t highlight it and provide some additional details you might not be taking into consideration.
And this update is that Social Security payments are, once again, going up next year. Specifically, about 70 million Americans will see an 8.7% increase in their Social Security benefits in 2023 due to the rise in inflation and, in turn, the rise in the cost of living.
In other words, prices for goods and services are significantly higher this year than last, and this increase in Social Security payments – which will be about $140 more per month, on average – helps to offset those higher costs.
Even better, those collecting the maximum monthly payout at full retirement age (this only represents about 2% of all recipients), will see an increase of $282/month, and that’s after the $197/month bump last year. So, an increase of almost $500 more per month in Social Security income for those receiving the max payout in the last two years.
Now, while these increases are meaningful, it’s important not to expect this sort of adjustment to happen every single year. In fact, the last time we saw an increase of over 8% was in 1981, 41 years ago. Cost of living adjustments, historically, have hovered around low single digits (1-4%), and in some years, like 2009, 2010, and 2015, there were no adjustments at all. We can probably throw 2016 in there as well since the adjustment was only 0.3%, and I’ll link to the history of COLA adjustments in the show notes if you want to check out the data yourself.
So, again it’s important to expect this sort of adjustment to happen every single year.
When running long-term retirement projections, using a historical average (or something a little lower than the average to stress the plan further), is likely the right approach. And if you want to take it a step further, you might even consider running retirement projections without factoring in Social Security at all just to know that your plan is successful without it. This can help bring even more confidence to your retirement plan, especially if you have concerns about the future of the Social Security system.
As for these 2023 increases, the Social Security Administration will be mailing out Cost of Living Adjustment notices to everyone in December, including disability beneficiaries, surviving spouses, and traditional social security recipients. If you’ve opted out of snail mail notices, you can, of course, log in to your dashboard on the Social Security website, SSA.gov, in early December when the notices are finalized to view your new benefit.
In fact, everyone who is listening, regardless of your age, should get registered on the Social Security website if you haven’t already. I’ll add a link to the episode show notes to make it easy for you. Along with getting eyes on your Social Security benefits so you can use accurate numbers in your long-term planning, getting registered will allow you to confirm that your personal information is accurate.
We have heard from far too many people who learned that the Social Security Administration had an incorrect birth date or a wrong social security number in their system preventing them from accessing their benefit information and getting their first check on time. These issues can’t always be fixed overnight, so I’d suggest confirming everything is accurate now, and fixing any issues, instead of frantically trying to correct things just as you are due to receive your benefits.
So, Social Security benefits are increasing by 8.7% next year. That’s the first update.
The second update to share with you today is an increase to the Social Security tax cap which affects those who are still employed and earning an income. As a reminder, those in the working world send 6.2% of their annual earnings to Social Security (or 12.4% if your self employed) – but only until income exceeds a certain threshold.
This threshold, often referred to as the Social Security tax cap, is increasing by $13,200 next year, bringing the cap up to $160,200. This change exposes more of your income to taxes and therefore puts more tax dollars in the Social Security Administrations' pockets. When and if your income exceeds $160,200, you’ll see a bump in take-home pay because you will no longer be sending 6.2% of your income to the Social Security Administration.
And for those who are currently taking Social Security and continue to work and earn an income, you’ll be able to earn $1,680 dollars more in 2023 before a percentage of your Social Security benefit is temporarily withheld. Here’s how this plays out.
If you are younger than your full retirement age, taking Social Security, and still working, you can earn up to $21,240 in 2023 before benefits are withheld.
But those of you who are in the year you turn your full retirement age and still working, you can earn up to $56,520 in 2023, just over a $4,500 increase from 2022. As a reminder, after your full retirement age is reached, there is no penalty for working while collecting Social Security benefits.
Before we move away from Social Security, one little sneaky tax increase that flies under the radar every year is the lack of an inflation adjustment on the taxability of Social Security payments.
As most know, 85% of your Social Security benefits can be taxed if your Modified Adjusted Gross Income plus one-half of your Social Security income exceeds $34,000 as a single filer and $44,000 as a joint filer. Well, as wages increase, portfolio values grow, and retirees receive cost of living adjustments on pension and Social Security income, more and more retirees, whether they realize it or not, are being exposed to a larger percentage of their Social Security benefits being taxed.
Again, the formula for the taxability of Social Security income has never been adjusted for inflation, so more income, means more tax revenue for the administration without having to announce any major changes and make headlines.
The third update to share with you today is that Medicare Part B premiums and deductibles are going down next year for most Americans. There is a small percentage of people that will still pay higher premiums, but for most, the monthly premium will be reduced by $5.20/month and the deductible will be reduced by $7. I know, not a very meaningful change, but historically, it’s only the fourth time Part B premiums have ever been reduced, with the last decrease occurring in 2012. So, if anything, just a rare event that we don’t see very often.
As a reminder, Medicare Part B covers doctors’ fees and outpatient services and are usually deducted directly from Social Security benefits. And the reason Part B premiums are being reduced is largely due to a single Alzheimers drug, Aduhelm. In November 2021, the Center for Medicare and Medicaid Services (CMS), had planned on the possibility of Medicare Part B covering this costly drug which is why premiums were increased last year in anticipation of this coverage. Well, that never came to fruition, so premiums will be knocked back down to true things up.
Lastly, there are dozens of other potential tax changes that will likely be announced soon, many as a result of Secure Act 2.0 hopefully passing soon. Right now, the Senate and House have each passed their version of the bill and there are only some minor differences to work out. "There’s nothing contentious there,” according to Andy Friedman, founder and editor of The Washington Update, and Andy believes the bill will get passed shortly after the November midterms in the lame duck session given that there are only a few small things to iron out.
If passed, the Required Minimum Distribution (or RMD) age will be increased to 73 by 2022, 74 by 2029, and 75 by 2032. For what it’s worth, Andy doesn’t believe Congress would make RMD age increases retroactive for 2022, so the first RMD extension to age 73 RMD will likely go into effect next year, in 2023, assuming this goes through as planned.
All in all, this is great news for retirement savers as it provides a longer window for tax planning in your gap years before those RMDs kick in. If you haven’t been as proactive with your tax planning as you would have liked, you will now, hopefully, have more time to get caught up.
For those who are still working, the bill also includes a new catch-up contribution window. In short, people who are aged 62 to 64 and still working can contribute an additional $10,000 per year to their 401k or 403b plans, or an additional $5,000 to Simple IRA plans.
One thing to take note of here is that these catch-up contributions will be taxed as Roth contributions, meaning you’ll pay taxes on the money earned before contributing to your retirement account. It will be an after-tax contribution that will then grow tax-deferred forever. This prevents the IRS from losing a large chunk of tax revenue due to the passing of a new bill while still giving people the benefit and opportunity to save more money for retirement.
As soon as the Secure Act 2.0 is passed and the anticipated wider 2023 tax brackets are confirmed, I’ll be sure to dedicate an episode or two to breaking everything down and sharing opportunities you can consider to reduce your tax bill next year and beyond.
Until then, stay focused on wrapping up all of the year-end tax planning opportunities that are known and available to us this year and require action before December 31st. And to help, I’ll be sharing a few interactive cheat sheets with Stay Wealthy newsletter subscribers this Thursday. So, if you’re not already on the email list receiving my weekly retirement newsletter, you can quickly join by going to youstaywealthy.com/email. There’s also a link in the show notes and in the episode description in your podcast app to make it easier for you.
Once again, to grab the show notes for today's episode, just head over to youstaywealthy.com/171.
Thank you, as always, for listening and I will see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.