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.
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were withdrawn.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.
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