History of the Individual Retirement Arrangement (IRA)

In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) that, among many other provisions, provided for the implementation of the Individual Retirement Arrangement.  This original IRA was not deductible from taxes, and the annual contribution limit was the lesser of $1,500 or 15% of household income.

Two primary goals of the IRA were to provide a tax-advantaged retirement plan to employees of businesses that could not provide a pension plan; as well as to provide a vehicle for preserving tax-deferred status of qualified plan assets at employment termination (rollovers).

The IRA, originally offered strictly through banks, become instantly popular, garnering contributions of $1.4 billion in the first year (1975).  Contributions continued to rise steadily, amounting to $4.8 billion by 1981.

1978’s Revenue Act implemented the Simplified Employee Pension IRA (SEP-IRA), which provided for a contributory retirement account, primarily for small businesses.

The Economic Recovery Tax Act (ERTA) of 1981 allowed for the IRA to become universally available as a savings incentive to all workers under age 70 1/2.  At that time, the annual contribution limit was also increased to $2,000 or 100% of compensation.

With the passage of the Tax Reform Act of 1986, income limit restrictions were introduced, limiting the availability of deductible contributions to the TIRA for individuals with incomes below $35,000 (single) or $50,000 (MFJ) when covered by an employer plan.  In addition, provision was made for the Spousal IRA, wherein the non-working spouse could make contributions to a TIRA from the working spouse’s income.  Non-deductible contributions were also allowed, for those individuals above the income limits, providing tax-deferred growth within the account.

In 1992, provisions were made to the TIRA to allow for “special purpose” distributions (known as §72(t) distributions), not subject to the 10% early withdrawal penalty.

1996’s Small Business Job Protection Act saw the implementation of the Savings Incentive Match Plan for Employees (SIMPLE IRA), which provided for employer matching and contributions to the employee plans, a viable alternative in many cases to the 401(k), although with more restrictive contribution limits.  This act also increased the amount for Spousal IRA contributions from $250 to the annual limit (at the time, $2,000).

With the Taxpayer Relief Act of 1997, the Roth IRA was introduced.  In addition, phase-out limits were increased, plus the distinction was added for limits on deductible contributions if the taxpayer was covered by an employer-provided retirement plan.

In 2001 came the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which further increased contribution limits, added a “catch-up” provision for taxpayers age 50 and older, and provided for a nonrefundable credit for certain contributions to IRA and 401(k) plans. These provisions are due to expire in 2010.

An additional provision in the EGTRRA was the option, available in 2010, for Traditional IRA owners to convert funds to a Roth IRA, regardless of income level – as normally anyone with an income above $100,000 is ineligible to convert funds from a TIRA to a RIRA.  In addition to releasing the income cap, converting taxpayers are allowed to split taxation evenly on the funds converted between tax years 2010 and 2011.

Most recently, the Pension Protection Act of 2006 allowed for charitable giving (free of tax) from an IRA, as well as introducing the Saver’s Credit, an income tax credit for lower income individuals, designed to incent retirement saving habits.

The most recent data I could find (from an ICI report in 2005) indicates that Americans held nearly $1.7 trillion in IRA accounts as of that point in time.

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author