History Of The Individual Retirement Arrangement

Note: it’s interesting to learn about IRA history in order to better understand why some provisions are the way they are. This IRA history is updated occasionally as new provisions are added.

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 income for tax purposes, 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 were unable to provide a pension plan; in addition, 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 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.