Individual Retirement Accounts or IRAs came on the investment scene with the enactment of the Employee Retirement Security Act (ERISA) in 1974. These individual retirement plans provided a reduction in taxable income, but contribution maximums were only $1,500 per year then. To further enhance IRAs, the IRS doesn’t tax the growth on the monies while they are accumulating, however upon withdrawal, all amounts disbursed are taxed at income tax rates, (a later article will discuss early withdrawal penalties as well as exception to the rules).
They were not entirely popular in the 1970’s since ERISA restricted contributions to only those that didn’t have an employer-provided retirement plan, or also known as a qualified plan. In 1981 the Economic Recovery Act removed that restriction and increased contribution maximums to $2,000, regardless how much money someone earned. In 1986 the Tax Reform Act limited or eliminated altogether the tax deduction, if someone had a qualified plan and had incomes over certain amounts. In the 1980’s sales of IRAs took off, and millions of people opened IRA accounts at their bank or credit union, insurance company, and investment firm and the investment landscape hasn’t been the same since.
There have been new IRAs such as the Roth and Education ones, since the 1980’s and various tweaks to them, but except for changes to contribution amounts, and income limitations, the basics of IRAs remain the same since then.
As a review…
- Contributions to IRAs reduce taxable income
- The amount of the contribution that someone can deduct from their income depends upon their income, if they have a qualified plan at work
- Individuals can still contribute to IRAs even if they are not able to deduct contributions, and they still maintain tax deferred growth
2012 Contribution Limits
- Additional $1,000 if over age 50
- IRA deduction if covered by a retirement at work from IRS.gov:
- IRA deduction if spouse is covered by a retirement plan at work:
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