IRA changes are worth noting

  • By Jim O’Neil
  • Saturday, July 17, 2004 9:00pm
  • Business

One of American’s most important retirement vehicles turns 30 this year – the Individual Retirement Account (IRA) – a tax-advantaged retirement vehicle for individual investors. The IRA was first introduced as part of the Employee Retirement Income Security Act of 1974 and has grown to be one of the most popular retirement vehicles in America.

Over the past 30 years the importance of this investment vehicle has increased dramatically. Changes in the business landscape have forced individuals to pick up the reigns of their retirement destinies, particularly as fixed benefit pension plans continue to taper off and individual retirement planning continues to rise. For many people, the IRA serves as a cornerstone of investing for retirement. In fact, according to a recent survey, more than 64 million participants held approximately $2.3 trillion in assets in IRAs.

The IRA, which was introduced as part of the Employee Retirement Income Security Act of 1974, had an initial annual contribution limit of $1,500. The limit was raised in 1981 the same year that 401(k) plans were first introduced to employees – to $2,000 annually. Contribution limits remained at that level for 20 years until the Economic Growth and Tax Relief Reconciliation Act of 2001 increased them to $5,000 (to be phased in over seven years), and added a “catch up” provision for individuals over the age of 50.

In addition to changes to contribution limits, more options for IRAs were created through the Taxpayer Relief Act of 1997 with the inception the Roth IRA. This vehicle allows for penalty-free – if not completely tax-free – withdrawals for certain qualified purchases, such as first-time home or educational expenses.

Eligibility for each type of IRA varies. For a traditional IRA, while anyone with earned income is eligible to make a contribution, the deductibility of the contribution depends on three factors. These include: the individual’s active participation in a employer-sponsored program such as a 401(k); the individual’s tax filing status; and relative to an individual’s tax filing status, the amount of one’s adjusted gross income (AGI). Joint filers’ AGI must be less than $65,000 and single filers’ AGI must fall below $45,000 to fully deduct contributions as of 2004.

For a Roth IRA, joint filers can have an AGI of no more than $150,000 and single filers’ are limited to an AGI of $95,000. As for the SEP IRA, which is a type of employer-established retirement plan, a qualifying business owner can contribute the lesser of 25 percent of compensation or up to $41,000. Investors should contact their tax advisor for specific contribution limits and eligibility requirements.

However, it is important that investors contact a financial adviser for specific information on contribution limits and eligibility requirements.

In just 30 short years, the IRA has helped change the way many Americans prepare for retirement. It will be interesting to see what the future holds for the evolution of this tool.

Jim O’Neil is an investment executive with Dain Rauscher Inc., a member, NYSE and SIPC. These answers are for informational purposes only and should not be considered a recommendation to buy or sell any security. Send investment questions to Investor’s Forum, The Herald, P.O. Box 930, Everett, WA 98206, by fax at 425-339-3435, or by e-mail at economy@

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