SUMMARY: The Vanguard article “Roth IRA vs. Traditional IRA: Rules & Tax Benefits” provides a comprehensive comparison between Roth and Traditional IRAs, focusing on eligibility, contribution limits, tax implications, and withdrawal rules. It emphasizes that the choice between the two depends on individual financial situations and retirement goals.Vanguard Investing Goals
Eligibility and Contribution Limits:
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Traditional IRA: Available to anyone with earned income, regardless of income level. However, the tax deductibility of contributions may be limited if the contributor or their spouse is covered by a workplace retirement plan and their income exceeds certain thresholds. Vanguard Investing Goals
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Roth IRA: Contributions are made with after-tax dollars and are subject to income limits. For 2025, single filers must have a modified adjusted gross income (MAGI) below $150,000, and married couples filing jointly must have a MAGI below $236,000 to contribute. Vanguard Investing Goals
Tax Treatment:
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Traditional IRA: Contributions may be tax-deductible, providing an immediate tax benefit. Earnings grow tax-deferred, and withdrawals in retirement are taxed as ordinary income.
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Roth IRA: Contributions are not tax-deductible, but earnings grow tax-free. Qualified withdrawals in retirement are also tax-free, provided certain conditions are met.
Withdrawal Rules:
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Traditional IRA: Withdrawals before age 59½ may be subject to a 10% penalty and income tax. Required Minimum Distributions (RMDs) must begin by April 1 of the year following the year the account holder turns 73. Vanguard Investing Goals+2Vanguard Investing Goals+2Wikipedia+2
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Roth IRA: Contributions can be withdrawn at any time without taxes or penalties. Earnings can be withdrawn tax-free if the account has been open for at least five years and the account holder is at least 59½. There are no RMDs during the account holder’s lifetime. Vanguard Investing Goals
Additional Considerations:
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Minors and Nonworking Spouses: Both IRAs allow contributions for minors with earned income and for nonworking spouses, provided certain conditions are met. Vanguard Investing Goals
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Contribution Limits: For 2025, the contribution limit for both IRAs is $7,000, or $8,000 for those aged 50 or older. Vanguard Investing Goals+4Vanguard Investing Goals+4Vanguard Investing Goals+4
The article concludes that choosing between a Roth and Traditional IRA depends on factors like current income, expected income in retirement, and tax considerations. It also suggests that some individuals may benefit from contributing to both types of IRAs to diversify their tax advantages.