Traditional IRA:
Pros:
- Tax-Deferred Growth: Contributions are typically tax-deductible, and the investments grow tax-deferred until withdrawal.
- Immediate Tax Break: Contributions may reduce your taxable income in the year they are made.
- No Income Limits for Contributions: Anyone with earned income can contribute, regardless of income level.
Cons:
- Taxable Withdrawals: Withdrawals in retirement are taxed as ordinary income.
- Required Minimum Distributions (RMDs): You must start taking RMDs at age 73.
- Early Withdrawal Penalties: Withdrawals before age 59½ may be subject to a 10% penalty, plus taxes.
Roth IRA:
Pros:
- Tax-Free Growth: Contributions are made with after-tax dollars, and qualified withdrawals are tax-free.
- No RMDs: Roth IRAs do not have required minimum distributions during the owner’s lifetime.
- Flexible Withdrawals: Contributions (but not earnings) can be withdrawn at any time without penalties or taxes.
Cons:
- No Immediate Tax Break: Contributions are not tax-deductible.
- Income Limits for Contributions: High earners may be restricted from contributing directly to a Roth IRA.
- Early Withdrawal Rules: While contributions can be withdrawn anytime, earnings withdrawn before age 59½ may incur taxes and penalties unless certain conditions are met.
Contribution Limits for 2024:
- Under Age 50: The maximum contribution limit for both Traditional and Roth IRAs is $6,500.
- Age 50 and Over: An additional catch-up contribution of $1,000 is allowed, bringing the total to $7,500.
Eligibility for Roth IRA Contributions (2024):
- Single Filers: Full contribution allowed if Modified Adjusted Gross Income (MAGI) is up to $138,000; phased out up to $153,000.
- Married Filing Jointly: Full contribution allowed if MAGI is up to $218,000; phased out up to $228,000.
These are the key differences, pros, cons, and contribution limits for Traditional and Roth IRAs for 2024.
– Lê Nguyễn Thanh Phương-