The introduction of the IRA created a new way for people to save for retirement. The IRA, sometimes called an Individual Retirement Account but recognized by the IRS as an Individual Retirement Agreement, has seen many developments over the years to modernize it, making it a more effective tax-preferred savings vehicle. There have been six major pieces of legislation responsible for the introduction and modification of the IRA as we know it today.
Employee Retirement Income Security Act
In 1974, the Employee Retirement Income Security Act, more commonly referred to as ERISA, was enacted by Congress. In this act, IRAs were introduced where participants were allowed to contribute a maximum of $1,500 of their annual taxable income into an IRA account. These contributions could reduce the annual adjusted income for the contributor and were only available to individuals not already covered by a qualified employer plan. The IRA required funds to be held until age 59 1/2 before non-penalized distributions could be made. These distributions would be added to income and had to be started by age 70 1/2.
1981 Economic Recovery Tax Act
ERISA was modified by the 1981 Economic Recovery Tax Act. The primary modification was that all persons under the age of 70 1/2 were eligible to contribute to an IRA. As a result of this act, it no longer mattered if individuals were covered by an employer's plan. Additionally, it raised the limit of contribution from $1,500 to $2,000 and allowed a spouse to contribute on behalf of a nonworking spouse up to $250 annually.
Tax Reform Act of 1986
Congress decided to add income limits of those eligible for IRA contributions with the Tax Reform Act of 1986. In this piece of legislation, deductions for the annual $2,000 IRA contribution would only be allowed for persons not covered by employer plans and below a specified annual income cap. Those with spouses covered by employer plans were also no longer able to take the deduction for contributions. These limits were set at $35,000 for unmarried contributors and $50,000 for those married filing joint tax returns.
Small Business Job Protection Act of 1996
As more data became available, it became apparent that the IRA system had a gap for those who worked as homemakers. This gap was filled in part by the Small Business Job Protection Act of 1996, where the spousal IRA limit was increased from $250 annually to $2,000. This meant that a couple saving for retirement could save nearly double what they could previously and get a higher tax deduction in the year the contribution was made.
Taxpayer Relief Act of 1997
The Taxpayer Relief Act of 1997 was one of the most revolutionary acts for retirement saving reform in history. First and foremost, it enacted a new IRA, the Roth IRA, which allowed for tax-free growth without a deduction of contributions. Income thresholds were increase allowing IRA contributions in Roth or traditional IRAs to be made for single filers making less than $40,000 and married couples not covered by an employer's plan making less than $160,000.
Economic Growth and Tax Relief Reconciliation Act of 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 gave those over the age of 50 the chance to make "catch-up" contributions. Recognizing that individuals closer to retirement often had the ability to save more, when children had left the home and mortgages were closer to being paid off, Congress initiated this reform which allows those qualified to contribute up to $6,000 of earned income into Roth or traditional IRAs and started a rising scale increasing the income limitations of those who were allowed to contribute through 2010.