2023 Cost of Living Adjustments to be Aware of for Retirement Accounts and Income

Saving for retirement and planning for the future is very important. For those that are looking to prepare for the future, there are various factors that need to be considered. One of the largest and most unpredictable is inflation. While this is unpredictable, there tend to be changes to how much you can save in tax-advantaged accounts and earn through Social Security. This year, there are various 2023 Cost-of-Living Adjustments (COLAs) that you should be aware of. 

Contribution Limit Increases for Certain Accounts

Old Man Distressed About Retirement Fund

One of the COLA changes that came in 2023 was an increase in contribution limits for certain tax-advantaged retirement savings accounts. Each year, the federal government has increased the amount of money that you can contribute to certain tax-advantaged retirement accounts. Due to overall inflation increases in 2022, the 2023 increases are higher than they have been in the past.

For those that are looking to contribute to a 401k, 403b, or 457b, which are tax-deferred investment accounts, the annual contribution limit was increased from $20,500 to $22,500, a 9.75% increase from the prior year. For those that are age 50 or older, the catch-up provision was increased from $6,500 to $7.500, a 15% increase.

Compensation Cap for Matching

Employer And Employee Factor In Cost Of Living Changes For Retirement Plan

Many employers today will help employees work towards their retirement investment goals. In general, the amount of money that is contributed as an employer match is based on a percentage of income. However, there is a cap on how much an employer can contribute based on employee salary.

For example, in 2022, the compensation cap was $305,000. This means that if an employer offers a 4% match, the most they could contribute to an employee was just over $12,000. The compensation cap in 2023 was increased to $330,000, nearly a 10% increase compared to the prior year. This offers a significant increase in employer match for higher-income employees. There is also a concept known as the defined contribution limit, which is the max that an employer can contribute to a 401k or other retirement plan. For 2023, this increased to $66,000 from $60,500.

HCE and Key Employee Thresholds

The IRS also manages highly compensated employees (HCE) and key employee thresholds that are used to manage and monitor retirement savings programs. The HCE threshold pertains to employees that either own more than 5% of the company or earned more than $150,000 and were ranked in the top fifth of all employees in terms of compensation. The $150,000 threshold for 2023 is an increase compared to 2022, when it was $135,000.

The key employee test is used to assess how much of a plan’s assets are held by key employees. If more than 60% of assets in the plan are held by key employees, it can be considered top-heavy by the IRS, and rebalancing through further employer contributions to employee accounts could be required. This threshold increased from $200,000 in 2022 to $215,000 in 2023.

Social Security Income

Inflation Affects Womans Retirement Investments

For those that are on Social Security, earning an appropriate income adjustment each year is very important. For 2023, the COLA adjustment was 8.7%, which was deemed appropriate given higher inflation and cost of living expenses that year. This figure is assessed annually and has led to a sizable increase for those that receive these benefits each year. 

Cost of living increases and overall inflation have continued to have a major impact on all areas of people’s financial and personal life. This can be particularly impactful for those that are either in retirement or preparing for the future. Each year, there are adjustments to various retirement plans that are based on increases in inflation and cost of living. In 2023, there are various COLAs to be aware of that can impact retirement income, your ability to save, and other factors. 



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I'm Crystal. I'm married to Dale, and mother to Johnny.Some might say that my life is perfect because I get to do all the cliché wife things like cooking, cleaning, and decorating - but there's more! I also have many hobbies including needlework (crochet), sewing, and reading. My son's education is important, so we homeschool him together.

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