History of The Roth IRA

The history of the Roth IRA is really a part of the IRA History because it started to reawaken the interest in IRAs and to help individual save money outside of their employer sponsored plan.

The Employee Retirement Securities Act of 1974 started the IRA history by allowing individuals who were not a part of an employee sponsored pension plan to invest into a tax deferred retirement plan.

The plan was similar to a traditional IRA today with one big difference. Employees could not contribute to both an IRA and an employer sponsored retirement plan such as a 401k. The Carter Administration set out to change this and in 1981 a new law passed allowing employees the opportunity to invest into both an IRA and a employee sponsored plan.

The idea behind this was that lower income workers could save up even more money and be in a better position for retirement. However in practice it didn’t work out like it was planned.

The ones who really took advantage of this new plan where not the low income workers, but the highly compensated employees, or the ones who could really afford to invest into it.

To combat this Congress passed the Tax Reform Act of 1986 which stopped anyone who was covered by an employer sponsored retirement plan from contributing to an IRA and getting the upfront tax break on their investment. The only exceptions were workers who earned less than $35,000 (for single filers) or $50,000 (for joint filers).

Obviously this had a terrible affect on the savings of the average American and the IRA contributions dropped to next to nothing. This would eventually lead to a new chapter in the IRA history.

History of the Roth IRA

The History of the IRA was about to create a completely new plan. The first Roth IRA like plan was proposed in 1995 and was called the “American Dream Savings Account” ADS account.

Unfortunately the plan was vetoed and never set into motion. Even so just 2 years later the Taxpayer Relief Act of 1997 passed and allowed people to contribute into a Roth IRA plan for first time ever in the year 1998.

The new plan allowed workers to contribute after tax dollars and have it grow tax deferred until they are eligible to withdraw the money tax free.

The plan also came with two more benefits. Anyone who contributes to an IRA can roll it over to a Roth IRA and the plan uses the current year’s income to determine eligibility of contribution or rollover.

When it was first created anyone who earned less than $95,000 a year (for single filers) or $150,000 a year (Joint filers) could contribute the maximum of $2,000 into the plan every year.

Also workers who earned between $95,000-110,000 (single) or $150,000-160,000 (joint) could still contribute, but the amount they could contribute each year was limited.

IRA Contribution History

When the IRA first came out a worker could contribute a maximum of $2,000 a year into the plan. In 2002 this was raised to $3,000. In 2005 it was raised again to $4,000 and finally in 2008 it was raised to $5,000 and is set to go up each year according to inflation.

IRA History Overview

The IRA history can be a bit complicated with all of the laws and rules that have been passed in recent years. But the history of the Roth IRA can also be a pretty interesting one as well and can help us understand how it came to be the way it is today.

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