Inflation and COLA: How they affect your IRA

Every autumn, American retirees eagerly await the announcement of the Cost-of-Living Adjustment (COLA), the annual adjustment designed to preserve their purchasing power in the face of inflation.

Indexed to the rise in consumer prices, the COLA determines the increase in Social Security benefits for the following year.

But its repercussions extend far beyond the simple amount paid by the administration. It can, more indirectly, impact your retirement savings, notably via Individual Retirement Accounts (IRAs).

Behind the mechanics of the COLA lies a broader logic, that of inflation, which impacts the entire retirement planning.

COLA: A safeguard against currency erosion

COLA, introduced in the 1970s, automatically adjusts Social Security benefits to compensate for increases in the cost of living.

It reflects inflation over a given reference period and, in theory, enables retirees to maintain a stable standard of living.

In 2025, the adjustment was 2.5%. For 2026, current estimates point to an increase of 2.7%, according to USA Today, in a context of moderate but persistent inflation.

The combined income tax trap

There’s an inconspicuous but very real consequence behind what at face value is good news: an increase in the COLA may be enough to push some retirees into a higher tax bracket. 

Total income, known as provisional income, includes both a portion of Social Security benefits and taxable withdrawals from a Traditional IRA.

Once certain thresholds have been crossed ($34,000 for a single person, $44,000 for a couple), up to 85% of Social Security benefits may become taxable.

Thus, an increase in benefits, combined with rising IRA withdrawals to meet rising living expenses, can lead to a higher tax bill. Real purchasing power is thus reduced, despite a nominal increase in income.

Inflation, a key factor in IRA contribution limits

Beyond its direct impact on Social Security benefits, inflation affects another crucial aspect of retirement planning: IRA contribution limits.

Each year, the IRS reviews these limits to take account of price trends.

If inflation exceeds a certain threshold, the limits are increased in fixed $500 increments, to enable taxpayers to maintain a stable level of savings in real terms.

For 2025, the IRA contribution limit remains at $7,000, with an additional $1,000 allowed for people aged 50 and over.

This ceiling was not raised this year despite real inflation, as the price increase was not deemed sufficient to trigger an adjustment under current calculation rules.

It isn’t clear what will happen next year, but the lesson is that moderate inflation can be accompanied by a ceiling freeze, which mechanically reduces savings capacity in constant dollars.

Controlling inflation helps control your retirement

Inflation is a factor that cannot be avoided or controlled, but it can be anticipated. From COLAs to IRA contribution limits, its influence is everywhere.

And while a 2.7% increase may seem modest, it can have a significant impact on your net income, your taxes and your ability to save.

In 2026, as inflation slows, contribution limits may remain unchanged. Yet prices will continue to rise, and so will budgetary pressure.

That's why it's so important to build a retirement strategy that's flexible, informed and in tune with economic realities. Behind every variation in inflation, the balance of your retirement is at stake.