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The History of IRAs

Even though most of us seem to have them, IRAs or Individual Retirement Accounts, are actually a rather recent innovation. Historically a person had three options for saving for retirement: traditional bank accounts, investments such as stocks and bonds, and annuities.

Author: Steven Hart
Date: Sep 13, 2011 - 1:11:06 PM

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Even though most of us seem to have them, IRAs or Individual Retirement Accounts, are actually a rather recent innovation. Historically a person had three options for saving for retirement: traditional bank accounts, investments such as stocks and bonds, and annuities. The drawback to all of these options was that they were subject to both income taxes and inflation. A person’s retirement savings be undermined by inflation or eaten up by taxes.

 

The Origin of IRAs

Since retirement savings options were limited, most people relied upon Social Security and employer pension plans for retirement income until the 1970s. In the early 1970s rising inflation and the collapse of several big pension programs made it apparent that pensions were no longer a reliable source of retirement income. Congress decided to create an alternative to pensions in the form of the Employee Income Security Act of 1974 which gave workers in participating plans the right to put up to $1,500 in tax deferred retirement investments a year.

 

The securities and banking industries responded to this by creating IRAs so workers could take advantage of the new tax deferments. The new arrangement had several advantages over pension plans, the chief advantage being that individuals were now in charge of their retirement savings. This meant a person who worked at several different jobs in his or her career could save for retirement. Since the savings were tax deferred the investor would not pay taxes until the funds were withdrawn.

 

Expansion of IRAs

Since their introduction, IRAs have increased in popularity and Congress has sought to expand their use. This has led to legislation making the plans available to almost all Americans.

 

In 1978 Congress created Simplified Employee Pension Plans (SEP IRAs) so the self employed and small business owners could take advantage of IRAs. In 1981, The Recovery Act allowed all Americans including persons who did not participate in employer retirement plans to open IRAs. This followed the creation of the first 401K plans that allowed employers to contribute to an employers’ IRA in 1980.

 

< h2>New Kinds of IRAs h2>

In 1996, the Small Business Job Protection Act gave nonworking persons the right to contribute to a spouse’s IRA. It also created the SIMPLE IRA or Savings Inceptive Match Plan for Employees which allowed small business owners to contribute to employees’ IRAs.

 

The Roth IRA was created by the Taxpayer Relief Act of 1997. This IRA allows a person to save more money making non-deductible contributions of funds that cannot be taxed when they are withdrawn.

 

Education IRAs

The Taxpayer Relief Act of 1997 also created Education IRAs or Education Savings Plans that allow parents to use an IRA type vehicle to set aside money for kids’ college. This was the first time such a tax deferred vehicle was used for something other than retirement. In 2002, Education IRAs became Coverdell Education Savings Accounts and Congress allowed parents to use them to save for private school tuition for children.

 

Changes to IRAs

In 2006, Congress allowed persons over 70½ years old to use money from an IRA for something other than retirement. The Pension Protection Act allowed IRA holders to make tax free gifts of funds from IRAs.

 

The use of IRAs will only expand in the future as other retirement options disappear. It is now possible to investment in almost anything including gold through an IRA so IRAs are now one of the most popular investments in America.

 

 

Steven Hart writes guides about Annuities, Retirement, Insurance, and other finance related topics. He has served as a Financial Advisor for more than 8 years now.

View all articles by Steven Hart

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