The History of the Traditional IRA

Individual Retirement Agreements (IRAs) are savings plans that receive tax benefits for participating and funding them. The money in IRAs grows tax-deferred and allows a person to save toward retirement. Traditional IRAs as we know them were established by the Tax Reform Act of 1986 and have been modified over the years to address growing retirement needs and adjust to economic conditions. Individuals can contribute to their IRA in the years they have earned income and start to take withdrawals at age 59 1/2 but are not required to withdraw funds until age 72 1/2. Distributions are taxed as income.

Employee Retirement Income Security Act of 1974

Prior to the Employee Retirement Income Security Act of 1974 (ERISA), employee pension plans did not require substantial disclosure. Pensions were not being funded appropriately and retirees were entering retirement with the shock that money they thought was set aside for retirement was not. As a measure to help save the interest of employee retirement benefits, the IRA was created. ERISA allowed employers to choose whether they wanted to have an employee pension plan. Employees that weren't offered one could open an IRA.

Economic Recovery Tax Act

While ERISA opened the door to allow tax-deferred growth, it has many restrictions. Employees were allowed to contribute up to 15 percent of their income or $1,500. In 1981, the IRA was reviewed and renovated in the Economic Recovery Tax Act where the contribution limitations were raised to $2,000 of earned income. It also provided that if $2,000 was the only income received, contributors could contribute 100% of income. Participants would receive a tax deduction for the amount contributed.

Tax Reform Act of 1986

In 1986, further guidelines were set that limited the amount that could be deducted for high-income households that already had pensions. The federal government was seeking to collect more taxes from high net worth individuals. These limitations allowed for contributions to be made but they were not deducted from the adjusted gross income for the family. Married couples filing jointly were allowed to elect one spouse as a zero income earner to establish a spousal IRA beginning in 1986.

Tax Relief Act of 1997

The ROTH IRA was established in 1997 as a way to help lower income earning families and individuals to save for retirement more efficiently. Contributions are not tax deductible as with Traditional IRA, but the ROTH IRA grows tax-free. This act increased the income limits for Traditional IRA contributions from $25,000 to $50,000 over time for single filers and $40,000 to $80,000 for married filing jointly. This increase happened on a scale that culminated in 2005.

Tax Increase Prevention and Reconcilliation Act of 2005

Traditional IRAs and ROTH IRA were given an increase in the contribution amount from $2,000 to $5,000. ROTH IRAs were created with a provision that allowed Traditional IRA owners to convert their IRAs to ROTH IRAs by adding the aggregate amount to their annual income, which needed to fall below $100,000 adjusted gross income in the year of conversion.