History of Contribution Limits of Traditional IRAs

By Kent Ninomiya

  • Overview

    Throughout the history of traditional IRAs, contribution limits have changed. During different tax years, traditional IRA investors can contribute different amounts. There are also different contribution limits for investors of different ages. It is important to know these rules before investing money in an IRA. The Internal Revenue Service enforces significant penalties for violating them.
  • History

    Congress created Individual Retirement Accounts in 1974 as a way for taxpayers to get a tax break while saving for retirement. Originally, investors could contribute up to $1500 a year and deduct that amount from their taxable income. IRAs were also limited to those who did not have a qualified employer retirement plan. That changed in 1981 with the Economic Recovery Tax Act. All taxpayers under the age of 70 and 1/2 years old were allowed to contribute to IRAs. It also increased contribution limits to $2000 per tax year. In 1986, the Tax Reform Act phased out IRA contribution deductions for high income earners. The Taxpayer Relief Act of 1997 created Roth IRAs. At that point, the original IRAs became known as traditional IRAs. The Economic Growth and Tax Relief Reconciliation Act of 2001 allowed for future increases of contribution limits and created catch up contributions for older investors.
  • Contribution Limits

    Anyone with earned income can make the maximum traditional IRA contribution as long as they had at least that much income in a given tax year. The contribution limits of traditional IRAs change from year to year. From 1974 until 1980, the limit for investors was $1500. From 1981 until 2001 it was $2000. The IRS raised the contribution limit for investors under 50 years old to $3000 in 2002, then $4000 in 2005, and $5000 in 2008. The Internal Revenue Service is expected to continue raising IRA contribution limits in the future. Check with the IRS for the most current maximum IRA contributions.

  • Deduction Limits

    Income limits affect the ability of an investor to take a tax deduction for a traditional IRA contribution if they are covered by a retirement plan at work. As of 2008, if a single person has an adjusted gross income higher than $63,000 or a married person has an AGI higher than $105,000, they are allowed no tax deduction for contributions to a traditional IRA. A single person with an AGI between $53,000 and $63,000 as well as a married people with AGI between $85,000 and $105,000 get a partial tax deduction. Those with lower AGI can deduct the entire traditional IRA contribution.
  • Catch Up Contributions

    Starting in 2002, investors 50 years old and older were allowed to make higher "catch up" contributions to their traditional IRAs. In 2002, the IRS established catch up contributions for traditional IRAs at $3500. In 2005 it was raised to $4500, then $5000 in 2006 and $6000 in 2008. The Internal Revenue Service is expected to continue raising maximum IRA contributions in the future. Check with the IRS for the most current maximum IRA contributions for older investors.
  • Ending Contributions

    Investors can no longer make contributions to traditional IRAs once they reach the age of 70 and one half years. This differs from Roth IRAs that allow contributions at any age. IRA contributions are assigned to a specific tax year. However, the deadline to contribute to a tax year is actually the tax filing deadline. This is April 15 of the next calendar year.
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