Target Date Funds are suitable for investors seeking a simplified, automatically managed retirement savings solution with a diversified portfolio. Traditional IRAs are better for those who prefer to actively manage their investments and have a wider range of investment options.
| Attribute | Target Date Funds (Vanguard Target Retirement Funds) | Traditional IRA |
|---|---|---|
| Investment fees (expense ratio) | Average expense ratio is 0.08%, significantly lower than the industry average of 0.43%. | Not applicable to the IRA itself, but rather to the investments held within the IRA. |
| Historical performance (annual returns) | Varies depending on the specific target date fund. The Vanguard Target Retirement 2045 Fund has a four-star rating from Morningstar. | Depends on the investments within the IRA. |
| Asset allocation strategy | Invests in a mix of U.S. and international stocks and bonds. The specific allocation depends on the target date, becoming more conservative as the target date approaches. | Determined by the investor based on their chosen investments. |
| Glide path (asset allocation over time) | Employs a glide path, shifting from a more aggressive to a more conservative investment approach as the fund moves toward and beyond its target date. | Not a standard feature of Traditional IRAs, unless you invest in a target date fund within the IRA. |
| Tax advantages (deductibility, growth) | Can be used within tax-advantaged accounts like IRAs or 401(k)s. Tax implications depend on whether the Target Date Fund is held within a Traditional IRA or another type of account. Traditional IRA: Contributions may be tax-deductible, and growth is tax-deferred. Withdrawals in retirement are taxed as ordinary income. | Contributions may be tax-deductible, reducing your taxable income. Investments grow tax-deferred until retirement. |
| Contribution limits | Determined by the type of retirement account. For 2024, the total contributions to all traditional and Roth IRAs is the smaller of: $7,000 (or $8,000 if you're age 50 or older), or your taxable compensation for the year. | For 2024, the limit is $7,000, or $8,000 if you're age 50 or older. The limit may be less if your taxable compensation for the year is lower. |
| Withdrawal rules and penalties | Depend on the type of retirement account. Generally, early withdrawals (before age 59 1/2) from Traditional IRAs are subject to a 10% penalty, unless an exception applies. | Generally, withdrawals before age 59 ½ are subject to a 10% federal penalty tax, as well as your usual income tax rate. State penalties may also apply. Exceptions to the penalty exist for certain situations, such as: Unreimbursed medical expenses exceeding a certain percentage of your adjusted gross income, Health insurance premiums paid while unemployed, Permanent disability, Higher education expenses, First-time home purchase (up to $10,000), Birth or adoption expenses (up to $5,000), Victims of domestic abuse can withdraw up to $10,000 (subject to cost-of-living adjustments starting in 2025) or 50% of their balance, whichever is less within one year of the abuse, A $1,000 withdrawal is allowed once in a calendar year for an unforeseeable or immediate financial need. Required minimum distributions (RMDs) must start by age 73 (or 72 if born before July 1, 1949). Failure to take RMDs can result in a 25% excise tax on the amount not withdrawn. |
| Investment options within the plan | Invests in Vanguard's broadest index funds. A fund like the Vanguard Target Retirement 2045 Fund (VTIVX) invests in various Vanguard equity and bond funds, resulting in allocations to domestic stocks, international stocks, U.S. corporate and Treasury bonds, and international bonds. | Wide range of options including stocks, bonds, ETFs, mutual funds, and CDs. |
| Minimum investment amount | $1,000 | Varies by institution; some allow you to start with as little as $1. Vanguard Target Retirement Funds require a minimum investment of $1,000. |
| Account management fees | The expense ratio covers the account management fees. | May apply, depending on the financial institution. |
| Employer matching (if applicable) | Depends on whether the Target Date Fund is offered within an employer-sponsored retirement plan. | Not applicable to Traditional IRAs, as they are individual retirement accounts. |
| Rollover options | You can typically roll over funds from other retirement accounts into a Traditional IRA that invests in Vanguard Target Retirement Funds. | You can roll over funds from other retirement accounts, such as a 401(k), into a Traditional IRA. |