Retirement Information: The History Of The Ira

A history of the individual retirement account (IRA) and investment accounts, explanation of the tax benefits as well as recent changes in tax laws and new tax acts.

The Employee Retirement Income Security Act (ERISA) of 1974 created what is known as a traditional individual retirement account (IRA). The IRA was established so those without employee-sponsored pensions could save for retirement. Contributions to the IRA would not be taxed (which means they were fully tax-deferred) until the funds were withdrawn, and a 10-percent penalty would be levied for early withdrawal of the funds (before age 59).

IRAs were strictly for those without pension coverage. Workers that had pensions weren't eligible to participate in IRAs, and many felt the restriction was unfair. The Carter Administration also found fault with the restriction, and made moves to rectify it. To spur individual saving and investment, a 1981 tax law was passed which extended IRA availability to all workers, even those with pension coverage. These rules were put into place to encourage lower-income workers to invest and save more, but it didn't work out that way.

It was discovered that mainly high-income workers were taking advantage of IRAs. Higher-income workers liked the advantages of the tax savings. Congress responded to this through the Tax Reform Act of 1986. The Act placed tighter restrictions on IRA provisions and implemented major changes. Only those without coverage in an employer-sponsored pension plan could have their deductions fully tax-deferred or they had to be below a certain income level ($35,000 for individuals and $50,000 for married couples). These restrictions were met with displeasure and eventually lead to the creation of a new type of IRA.



The Roth IRA resulted from The Taxpayer Relief Act enacted in 1997. The Roth IRA removed some of the restrictions associated with the traditional IRA. For example, employees were not bound by the income levels imposed by the traditional IRA. Contributions to the Roth IRA were not tax deductible as with the traditional IRA. However, no tax would be levied upon withdrawal of the funds.

Roth IRA funds could be withdrawn without penalty once the participant reached the age of 59. Also in contrast to the traditional IRA, Roth IRA funds could stay invested indefinitely. Funds could be left in the Roth IRA for future generations, unlike the traditional IRA which policy holders must start withdrawing funds from by age 70.

Congress once again changed the laws concerning IRAs in 2001. At that time, both traditional and Roth IRAs allowed a maximum contribution of $2,000. The Economic Growth and Tax Relief Reconciliation Act raised these limits. The maximum contribution amount was raised to $3,000 in 2002. In 2005 the maximum will be raised to $4,000, and 2008 will see a $5,000 maximum. After that, the limit is set to be raised in accord with current inflation.

Regardless of the tax benefits offered by IRAs, they weren't the savings vehicles that many hoped they would be. Most businesses started to offer 401(k) plans or pension plans, and more people began showing an interest in the stock market. IRAs were regulated to being used to store funds rolled over from employer-sponsored plans, as opposed to being used to start new savings accounts from scratch.

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