Thanks to Inflation...

Inflation has been working it’s dark magic in a variety of ways for the last year or so. We’re all painfully aware of it’s impact on gasoline prices, food, housing, and just about everything else under the sun that costs money. It’s not all bad news, however. Most government limits on retirement savings are tied to inflation and have recently been increased for 2023, allowing us to save more for our future. Of course this only helps if we can afford it, but more opportunity is better than less, right?

Here’s a rundown of some of the updates to keep in mind for next year if you’re still saving for retirement.

Individuals younger than 50 can contribute $22,500, up from $20,500 this year, to their 401(k), 403(b), and 457 plans. The “catch-up” contribution for those 50 or older goes up to $7,500 from $6,500 for a potential total contribution of $30,000 from the employee in 2023 for those 50 or older. Company matching doesn’t impact these limits.

The maximum IRA contribution increases to $6,500 from $6,000. The catch-up works the same way as above but is still $1,000 like this year because, for whatever reason, that provision isn’t tied to inflation.

The phase-out ranges impacting deductibility of IRA contributions are tied to inflation, so those are rising too and allow savers to earn from $5,000 to $7,000 more of income and still deduct contributions on their taxes. For example, a single person could earn up to $83,000 next year and deduct some of their IRA contribution. Married couples can go up to $136,000 of income. (That’s a simplified way to look at the phase-outs, but a tax advisor can help determine if they impact you.) The phase-out ranges are even higher for Roth IRA contributions.

The personal and family limits for HSA contributions will go up to $3,850 and $7,750, respectively. HSAs also have a catch-up provision that starts at age 55 but, as with IRAs, is still $1,000.

Here’s a link to an IRS document for more minutia and inflation adjustments to other provisions.

https://www.irs.gov/pub/irs-drop/n-22-55.pdf

This extra room to save into tax deferred accounts comes at a good time given the tumult in stock and bond markets. Through last Friday, the S&P 500 is down 20% this year while Big Tech and other sectors are down 30+%. Medium-term bonds are down maybe 12% - 20%, depending on type. This means that long-term money can be saved today at a discount. These next several months tend to be some of the best of the year for the markets, so planning to front-load your accounts early in the new year (and topping off your accounts for this year as well) may make sense, again assuming you can afford it.

A risk here is getting too carried away with retirement savings and neglecting your emergency fund. Generally speaking, withdrawing from a retirement account before age 59 ½ comes with taxes and a penalty, so avoid overextending yourself. Always, always, always, keep a clear line between what of your savings is investible for the long-term and what needs to be kept at the bank for short-term liquidity.

A quick note on interest rates…

By now you’ve heard that the Fed raised it’s short-term benchmark interest rate by 0.75% again last week. As I’ve mentioned in other posts, each change reverberates throughout the US and global economies, and we’ve now had six increases since March. That’s a lot in a short time and more increases are expected. In fact, much of the market’s gyrations this year and again last week were based on rapidly (literally as Fed Chair Jerome Powell was giving his press conference on Wednesday) evolving thoughts on where the Fed’s collective head is at with rates – what’s their target? We began the year with short-term rates at essentially 0% and now we’re at 4%. A variety of folks are expecting we need to get to 5% or 6% before the Fed stops raising for a while to let things settle, but that outlook changes often. Inflation, at least according to the Fed, is expected to wane into next summer but Fed officials say they want to see that happen “decisively” before changing their stance on rates.

I mention all this again because the common thread from most market prognosticators is to expect that rates will remain high for some time, perhaps a couple of years or longer. This has likely already impacted your personal balance sheet by increasing the cost of any variable rate debt, say on a home equity line, while also potentially reducing your home’s value: a double whammy. If you still have variable debt tied to PRIME (now at 7%, up from 3.25% in January) or perhaps a LIBOR index (at 4.6%, up from maybe 0.2% in January, depending on which LIBOR term we’re looking at), call the lender to see about transitioning to a fixed rate. That may not be an option, or it may not make the best sense for you based on your loan terms, but I can help evaluate if there’s any way to refi out of rising-rate debt or perhaps pay it off with other assets.

Have questions? Ask me. I can help.