When was the Roth IRA Law Created?
Congress created the Roth Individual Retirement Account when it passed the Taxpayer Relief Act in 1997, a law that took effect in 1998. The law established what was then a new concept: IRA owners would pay taxes on their contributions, in return for the possibility of tax-free withdrawals after retirement. This was a departure from original IRA rules, which allowed before-tax contributions, but taxed withdrawals.
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Political History
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The Roth IRA concept was first introduced to the public as part of the Republican Party platform in 1994, known as the "Contract with America." At the time, Republicans called it the "American Dream Savings Account," but eventually named the account after its advocate, Senator William Roth of Delaware. In 1995, then-President Bill Clinton vetoed the first legislation, passed by Congress in 1995.
Early Legislation
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So-called "traditional" IRAs, which preceded Roth IRAs, introduced the concept of the tax-advantaged retirement savings account. Established in 1974 under the Employee Retirement Income Security Act, traditional IRA rules allowed workers to deduct up to $1,500 in contributions annually and defer paying taxes until retirement. Subsequent pre-Roth legislation increased the maximum annual contribution to $2,000. In 1986, Congress passed the Tax Reform Act, a law that set income limits that phased out some high earners from taking a deduction, notes the Congressional Budget Office.
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Effects
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Though Congress did not create Roth IRAs until 1997, traditional IRA legislation laid the groundwork for features of Roth accounts. As of 2010, the Internal Revenue Service sets annual income limits that phase out high earners from making Roth IRA contributions. Roth IRAs also have an annual contribution cap. At the passage of Taxpayer Relief Act, the limit was $2,000. As of 2010, it was $5,000 for those under 50, and $6,000 for those 50 and older.
The Roth Loophole
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In 1998, Congress passed the IRS Restructuring and Reform Act, which Greg Reymann of the Roth IRA website describes as eliminating a major loophole in the initial 1997 legislation. Roth IRA owners can withdraw the entire amount of their contributions anytime without penalty, because they have already paid taxes on them. Traditional IRA owners, however, owe a 10 percent penalty on their early withdrawals. The rules provided a loophole: people could contribute to a traditional IRA and write off their contribution, then immediately convert the money to a Roth IRA and withdraw it without paying a penalty. The 1998 legislation established that owners could only make one such conversion annually, and could not re-convert amounts once converted.
Conversion Rules
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The 1997 Taxpayer Relief Act allowed people to convert their 401ks, or traditional, SIMPLE or SEP IRAs, to Roth IRAs only if their adjusted gross income did not exceed $100,000. Legislation that took effect in 2010 removed this cap, and in doing so, created a loophole that allows high earners to skirt Roth IRA income limits. For instance, as of 2010, the IRS phased out Roth IRA contributions for people who are married, filing jointly who make more than $177,000. High earners can contribute to a nondeductible traditional IRA, however, for which there are no income limits, and immediately roll the funds into a Roth IRA, notes Kaye Thomas of Fairmark.com.
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