You can invest more in your 401k and IRA in 2023 — but should you be maximizing your contributions?

The IRS has raised contribution limits on 401(k)s and IRAs in 2023 because of inflation. With inflation clocking in at 8.2% over the past year, government agencies are implementing changes to accommodate the higher cost of living. The Social Security recently administration announced an 8.7% cost-of-living adjustment for retirees in 2023.

Select looks at some of the changes happening to 401(k)s and IRAs for 2023, and whether you should be changing your savings strategies in response.

401(k) contribution limits for 2023

For 2023, the annual contribution limit for 401(k)s, 403(b)s, most 457 plans, and Thrift Savings Plan is $22,500, up from $20,500 in 2022.

Individuals above the age of 50 are also eligible for catch-up contributions to their 401(k). This means that these individuals can contribute above the $22,500 limit. The IRS increased the catch-up contribution value in 2023, from $6,500 in 2022 to $7,500. In total, employees above the age of 50 can contribute up to $30,000 to their 401(k). The IRS did not raise catch-up contributions for traditional or Roth IRAs.

IRA and Roth IRA contribution limits for 2023

For people who have a retirement account outside of their employer, annual contribution limits have increased for both traditional IRAs and Roth IRAs. In 2023, eligible individuals can contribute up to $6,500, up from $6,000, to their IRAs.

Roth IRAs have income limits, so individuals making above a certain income threshold are eligible for reduced contributions. Individuals who make above the upper range of that threshold are not eligible at all.

In 2023, the income phase-out range for single filers is $138,000 to $153,000. For married couples filing jointly, it's $218,000 and $228,000.

With the annual 401(k) contribution limit rising, you might feel pressure to put more money into retirement savings. However, most people aren't contributing up to the 401(k) limit anyways: a recent Vanguard report found that only 14% of people with Vanguard 401(k) accounts were contributing the maximum amount allowed. The majority (58%) of those people were making more than $150,000 annually. 

And even having access to a 401(k) puts you in a better position than many — in March 2022, 72% of public and private employees had access to some type of employer-sponsored retirement plan like a 401(k) or pension plan.

So if you're wondering whether you need to contribute more money to your 401(k) or IRA now, it really depends on your individual finances. If your employer offers to match a percentage of your contributions, your first priority should be contributing enough to earn the match. By not taking advantage of the match, you're essentially losing out on free money.

From there, if you have more money to invest, you'll want to consider possibly opening up a Roth IRA to take advantage of the tax benefits it offers. You can contribute to both a 401(k) and Roth IRA at the same time, as long as you meet the income requirements of a Roth IRA. With a Roth IRA, contributions are taxed up front, so you don't have to pay taxes on your investments or investment gains when you take distributions in retirement.

Select ranked Charles Schwab, Fidelity Investments and Ally Invest as some of the companies offering the best Roth IRAs based on factors like investment options, ease-of-use and fees. 

Researchers at Vanguard recommend that people aim to invest 12% to 15% of their annual income towards retirement. If you're not there yet, try ramping up the percentage of money you save over time. For example, if you're currently investing 6% of your salary in order to earn your employer's match, you might increase that amount to 7% the next year and 8% the year after.

Regardless of how much you can put towards retirement, it's important to contribute early and on a consistent basis. Remember, that the sooner you contribute to your retirement accounts, the more time compound interest has to work its magic and help your money grow.

In 2023, individuals will be eligible to contribute more to their 401(k)s than they had been in the past. The IRS increased the annual 401(k) contribution limit from $20,500 to $22,500. People who have Roth and traditional IRAs can also contribute more to these accounts in 2023, up to $6,500 annually.

Even though you can contribute more to these accounts, it doesn't mean you have to. Instead, focus on attaining your employer match (if they offer one) and increasing your annual savings rate over time.

Catch up on Select's in-depth coverage of personal finance, tech and tools, wellness and more, and follow us on Facebook, Instagram and Twitter to stay up to date.