The History of Roth IRA Accounts
Roth IRA accounts are a historical article that discusses the history of Roth IRA accounts and how they differ from the history of traditional IRA accounts. Roth IRA accounts were established in 1997, making them a relatively new type of retirement investment account compared to traditional IRA accounts or 401(k) accounts. Learn more about the history of Roth IRA accounts, including the reasons that led Congress to create them, how the limits have changed, and how their history differs from that of traditional IRA accounts.
The History of Roth IRA Accounts
Individual retirement accounts, or IRAs, were first established under the Employee Retirement Income Security Act of 1974. The goal was to encourage all workers to save for retirement, even if their employers did not offer pension plans. The IRAs created under this act are known as “traditional IRAs.” Contributions to traditional IRAs are tax-deductible, but withdrawals are taxed.
Initially, Congress limited IRAs to workers who were not covered by retirement plans. However, the Economic Recovery Tax Act of 1981 expanded eligibility for all workers and their spouses. But the Tax Reform Act of 1986 restricted the tax benefit for contributions for workers who did not have a workplace retirement plan and whose incomes fell below certain thresholds.
Roth IRA accounts were created under the Taxpayer Relief Act of 1997, which reorganized the rules regarding capital gains. The law reduced the maximum capital gains tax rates for individuals from 28% to 20% and shielded many taxpayers from paying capital gains taxes on the sale of their homes.
Roth IRA accounts are named after the late Senator William Roth (Republican from Delaware). They differed from traditional IRAs in that account holders can make after-tax contributions and then withdraw them tax-free in retirement, including the gains from investments.
Roth IRAs allow tax-free withdrawals of earnings once the account holder reaches age 59 and a half and has held the account for at least five years. You can withdraw your contributions from your Roth account at any time.
Individuals who are over age 70 and a half cannot contribute to traditional IRAs, but individuals with earned income can fund Roth IRAs regardless of age. The SECURE Act of 2019 eliminated the age restrictions. While traditional IRAs are subject to required minimum distributions (RMDs), Roth IRAs do not require any distributions at all.
Traditional IRA vs. Roth IRA
Roth IRA Traditional IRA
The traditional IRA was established under the Employee Retirement Income Security Act of 1974 (ERISA). Congress later passed the Taxpayer Relief Act of 1997, which created the Roth IRA.
How the IRA Works
You make contributions to a Roth IRA after paying taxes on your earnings, and then you can take tax-free distributions on those earnings when you reach age 59 and a half if you have had the account for at least five years.
You can withdraw your contributions to a Roth IRA at any time without any penalty. In contrast, contributions to a traditional IRA can be deductible for many taxpayers. However, withdrawals are taxed as ordinary income in retirement.
Original Eligibility Rules
The traditional IRA was limited to workers who were not covered by workplace retirement plans when ERISA created it in 1974. The traditional IRA became available to all workers and their spouses in 1981 through the Economic Recovery Act.
Income limits have applied to Roth IRAs since they became available in 1998. Individuals who file singly can make the full contribution if their income is $95,000 or less at that time, or a phased-out amount if their income is between $95,000 and $110,000.
Individuals who file jointly can contribute the full amount if their combined income is $190,000 or less. However, if their income is above $190,000, they become ineligible to contribute. Individuals with incomes between these thresholds can make a phased-out contribution.
For married couples who file jointly, they can make the full contribution to a Roth IRA if their combined income is less than $150,000, and a phased amount if their income is between $150,000 and $160,000. Taxpayers earning more than $160,000 are not eligible to fund a Roth IRA.
History of the Roth 401(k)
The Roth 401(k) became available in 2006. The Roth 401(k) is essentially a hybrid plan that allows employees to invest after-tax dollars, but unlike the Roth IRA, these accounts require minimum distributions by age 70 and a half.
Senator Roth called for the creation of the Roth 401(k) in 1999 to allow tax-free growth when workers invest after-tax dollars in employer-sponsored retirement plans. The goal was to provide further incentives for Americans to save for retirement. According to the Plan Sponsor Council of America, over 86% of 401(k) plans offered a Roth option by 2020.
How Contribution Limits Change Over Time
The Economic Growth and Tax Relief Reconciliation Act of 2001 increased the maximum contribution limit for IRAs to $3,000 and also allowed workers over age 50 to make additional contributions. It also indexed IRA contribution limits to inflation.
The Internal Revenue Service (IRS) typically issues IRA contribution limits every November, often providing adjustments. The maximum contribution limit for both Roth and traditional IRAs was $6,000 in 2022. This has not changed since 2019, but it will increase to $6,500 in 2023. Individuals over age 50 can make an additional contribution of $1,000.
Frequently Asked Questions
How do you open a Roth IRA?
You can open a Roth IRA at many financial institutions, including brokerage firms, banks, and credit unions. You’ll transfer money from your bank account and then select investments after opening the account.
When can you withdraw from a Roth IRA?
You can withdraw your Roth IRA contributions tax-free and penalty-free at any time. However, you may have to pay taxes and a 10% penalty if you withdraw account earnings before age 59 and a half or if you haven’t held the account for at least five years.
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Sources:
The sources used in this article are high-quality peer-reviewed studies to support the facts mentioned within. Please read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Congressional Research Service. “Traditional and Roth Individual Retirement Accounts (IRAs): A Primer.”
Congressional Office. “Taxpayer Relief Act of 1997.”
U.S. Congress. “Taxpayer Relief Act of 1997.”
U.S. Bureau of Labor Statistics. “Another Retirement Savings Option: The Roth 401(k) Plan.”
Plan Sponsor Council of America. “Retirement Plans Looking More Secure | Plan Sponsor Council of America.”
Internal Revenue Service. “Retirement Topics – IRA Contribution Limits.”
Internal Revenue Service. “Publication 590-B for 2021.”
Source: https://www.thebalancemoney.com/when-did-roth-iras-start-5270881
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