This article was originally published on Kiplinger.com.
This year, constantly rising prices, the war in Ukraine, a roller-coaster stock market and concerns about job security have made many older Americans who thought they had nothing to worry about financially start questioning their long-term financial security.
But within all of these gloom-and-doom scenarios, there are some nuggets of good news on the horizon, especially for those who are finding it a little harder to make ends meet or those who want to reduce their taxable income next year. Let’s look at five of these potential “silver lining” situations in greater detail.
1. Social Security payments will rise by the highest amount in decades
If you rely on Social Security for a good portion of your retirement income, you’re about to get some breathing room. That’s because the annual Social Security cost-of-living adjustment (COLA) will rise 8.7% in 2023. This is the largest increase since 1981.
Of course, there’s a reason for this dramatic increase: inflation. With prices for everything from gasoline to produce to building materials rising at speeds unseen since the early 1980s, the COLA is designed to help preserve the purchasing power of Social Security payments.
And if prices start to fall next year, seniors will benefit even more, since their Social Security checks will stay the same regardless of what happens in the economy — until they’re adjusted again in October 2023.
2. Medicare premiums will decline next year
Since Medicare premiums are generally deducted from Social Security checks, an increase in premiums can dilute the benefit of a COLA.
This is exactly what happened in 2022. Initially, many seniors rejoiced when the COLA rose by 5.9%. But their joy was dampened when they discovered that their Medicare Part B premiums would increase from $148.50 to $170.10 per month, a significant jump. By comparison, premiums rose by only $3.90 from 2020 to 2021.
The main reason for this dramatic increase was Medicare’s decision to fully cover the $56,000 annual cost for Aduhelm, a controversial drug used to treat Alzheimer’s disease.
Initially, Medicare was committed to covering these costs for all subscribers. But doubts over the drug’s efficacy allowed Medicare to change its policy to cover costs for only a very small group of patients going through clinical trials.
These developments didn’t compel the Medicare administration to reduce premiums midyear. Instead, they decided to pass on these cost savings to subscribers when new premiums were announced in September 2022.
Monthly Part B premiums will start at $164.90, a decrease of more than $5 per month. Okay, it’s not a huge decrease, but it’s better than an increase. (Premiums rise if your annual income is above a certain level. More on this later.)
For seniors, this combination of higher Social Security payments coupled with a decrease in Medicare premium payments will be good news if they’re generally healthy and don’t require extensive medical treatment or expensive prescription drugs.
3. Retirement account contribution limits are rising significantly
If you’re still working and want to maximize contributions to your employer-sponsored retirement plan, there’s more good news. Next year, the limit on annual employee contributions to 401(k), 403(b) and most 457 plans will increase to $22,500, up from $20,500 in 2022, plus up to $7,500 in additional catch-up contributions for those 50 and older.
And if you’re still contributing to an IRA, which you can do even if you’re already taking Required Minimum Distributions (RMDs), the annual contribution limit will increase from $6,000 in 2022 to $6,500 in 2023, plus an extra $1,000 in annual catch-up contributions if you’re over age 50.
4. Higher IRS income thresholds
In response to inflation, the IRS is adjusting many income thresholds upward for tax-year 2023. This may reduce what many taxpayers will owe to Uncle Sam.
For example, the ordinary income ranges for each federal tax bracket will rise, which may reduce tax bills for many Americans.
And the standard deduction for married couples will rise to $27,000, up from $25,200 in 2022. For single taxpayers and married couples filing individually, the standard deduction will rise from $12,950 in 2022 to $13,850 in 2023.
5. RMDs could potentially be lower in 2023
Many retirees have seen the value of their retirement assets drop by 20% or more this year. While this has forced many to adjust their spending habits, it may actually result in one benefit for retirees who don’t need withdrawals from their retirement accounts to live on: lower RMDs.
Because RMD amounts for the new year are based on the value of assets in retirement accounts as of the last day of the preceding year.
In other words, your RMD for 2023 will be based on how much your traditional IRA and pre-tax 401(k) accounts are worth as of Dec. 31, 2022.
This process worked against retirees this year, since 2022 RMDs were based on the value of accounts on the last day of 2021, when the stock market was at its peak.
We all know what happened after that.
Unfortunately, RMDs can’t be adjusted downward when bear markets occur. So, many retirees faced the double whammy of having to take RMDs that no longer reflected the true value of their nest eggs. And they had to pay taxes on these distributions while they were also paying record-high prices at the supermarket and gas pump.
While it is possible that the market will recover all of its losses by the end of the year, few people are betting on this outcome.
Obviously, this isn’t good news if you depend on your retirement accounts to provide income to help you pay for your living expenses.
But if you don’t need income from RMDs to live on, the prospects of lower RMDs next year may provide tax relief. Lower RMDs mean less taxable income. This is particularly important if you’re taking Social Security benefits or enrolled in Medicare.
Why? Because Social Security benefits start getting taxed when your total annual income is above a certain level ($28,000 for individual tax filers, $32,000 for couples filing jointly).
Medicare premiums start to increase when your total income is more than $97,000 as an individual tax filer ($194,000 for joint filers).
Figuring it all out
All of these “silver linings” won’t be of much use if they somehow throw your retirement financial plan out of whack. That’s why you may want to seek the services of a financial advisor to help you make the most of these opportunities.
This article was authored by David Jaeger and Jeffrey Briskin. David is a financial advisor at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or firstname.lastname@example.org. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
©2022 Canby Financial Advisors.