As a young couple, your annual individual retirement account (IRA) contributions are one of your biggest tax deductions — if you meet the requirements to deduct an IRA. IRA deduction amounts have gone through several major changes since 1974 when a law passed by Congress allowed workers not covered by a pension plan to contribute and deduct money deposited in a personal IRA.
The Employee Retirement Income Security Act (ERISA) of 1974 completely overhauled the retirement and pension plan systems. The Act also created the Individual Retirement Account (IRA), which allowed workers not covered by an employer's pensions to make tax-deductible contributions into an IRA. The initial contribution and deduction limit set by ERISA was $1,500 or 15 percent of wages, whichever was less. In 1981, the Economic Recovery Tax Act opened up IRAs to all wage earners under the age of 70 1/2.
Historical Contribution Limits
In 1981, the annual contribution limit was increased to $2,000 from the initial $1,500. The maximum IRA contribution remained at $2,000 for over 20 years. The Economic Growth and Tax Relief Reconciliation Act of 2001 increased the contribution limits to $3,000 for 2002, $4,000 in 2005 and $5,000 in 2008. After 2008, the Internal Revenue Service will increase the contribution limits in $500 increments to keep up with the cost of living. The IRA contribution limit was increased to $5,500 for 2013. The 2001 Act also lets an individual age 50 or older increase her annual contribution by an additional $1,000.
The Tax Reform Act of 1986 resulted in a difference between the IRA contribution limit and how much someone could deduct. With the Act, wage earners at certain income levels covered by an employer-sponsored retirement plan saw the IRA deduction phased out for higher-income earners. The IRA deduction phase-out income level depends your filing status and whether you or a spouse is covered by a plan at work. The incomes at which an IRA would not be deductible have increased steadily over the years. In 1986, a someone with a pension plan and filing taxes as married would lose the IRA deduction at an income of $50,000. For 2013 the income limit (above which you can't make an IRA deduction) is $115,000.
Other IRA Types
There are a few other types of retirement accounts also classified as IRAs. Roth IRAs were created in the 1990's. Annual IRA contributions can be made into a Roth IRA instead of a traditional IRA. Roth IRA contributions are never deductible. SEP-IRA and SIMPLE IRA accounts are retirement plans that must be established by a business. SEP-IRA contributions to employee accounts are made by the employer and the employer gets the tax deduction. A SIMPLE IRA allows employees to defer a portion of wages into an IRA account. For 2013, the SIMPLE IRA deferral limit is $12,000 with an additional $2,500 allowed for employees age 50 and older.
The 1981 tax act also authorized a $250-per-year contribution into the IRA of a non-working spouse. In 1996, the contribution limit for a non-working spouse increased to $2,000 to match the contribution of the working side of the family. Since 2002, as the contribution limit for a working individual has increased, the non-working spouse contribution limit has been increased to the same level, including the $1,000 additional contribution if you are age 50 or over.
- Senate.gov: Individual Retirement Accounts (IRAs): Issues and Proposed Expansion
- Forbes: Deduct This: History of the IRA Deduction
- IRS: 2013 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work
- IRS: Like Share Print Retirement Topics - SIMPLE IRA Contribution Limits
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.