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.
IRAs FAQs
An IRA (Individual Retirement Account) allows you to make tax-deferred investments to save money and provide financial security when you retire. There are different types of IRAs, the most common being a traditional one – in which contributions may be tax-deductible – and a Roth IRA, a personal savings plan where contributions are not tax deductible but earnings and withdrawals may be tax-free. When you add money to your IRA, this can be invested in a wide range of financial products, usually a portfolio based on bonds, stocks and mutual funds.
Yes. For conventional IRAs, one can get exposure to Gold by investing in Gold-focused securities, such as ETFs. In the case of a self-directed IRA (SDIRA), which offers the possibility of investing in alternative assets, Gold and precious metals are available. In such cases, the investment is based on holding physical Gold (or any other precious metals like Silver, Platinum or Palladium). When investing in a Gold IRA, you don’t keep the physical metal, but a custodian entity does.
They are different products, both designed to help individuals save for retirement. The 401(k) is sponsored by employers and is built by deducting contributions directly from the paycheck, which are usually matched by the employer. Decisions on investment are very limited. An IRA, meanwhile, is a plan that an individual opens with a financial institution and offers more investment options. Both systems are quite similar in terms of taxation as contributions are either made pre-tax or are tax-deductible. You don’t have to choose one or the other: even if you have a 401(k) plan, you may be able to put extra money aside in an IRA
The US Internal Revenue Service (IRS) doesn’t specifically give any requirements regarding minimum contributions to start and deposit in an IRA (it does, however, for conversions and withdrawals). Still, some brokers may require a minimum amount depending on the funds you would like to invest in. On the other hand, the IRS establishes a maximum amount that an individual can contribute to their IRA each year.
Investment volatility is an inherent risk to any portfolio, including an IRA. The more traditional IRAs – based on a portfolio made of stocks, bonds, or mutual funds – is subject to market fluctuations and can lead to potential losses over time. Having said that, IRAs are long-term investments (even over decades), and markets tend to rise beyond short-term corrections. Still, every investor should consider their risk tolerance and choose a portfolio that suits it. Stocks tend to be more volatile than bonds, and assets available in certain self-directed IRAs, such as precious metals or cryptocurrencies, can face extremely high volatility. Diversifying your IRA investments across asset classes, sectors and geographic regions is one way to protect it against market fluctuations that could threaten its health.
Author
Ghiles Guezout
FXStreet
Ghiles Guezout is a Market Analyst with a strong background in stock market investments, trading, and cryptocurrencies. He combines fundamental and technical analysis skills to identify market opportunities.
