96-20 EPW
Updated June 8, 1998
CRS Report for Congress
Received through the CRS Web
Individual Retirement Accounts (IRAs):
Legislative Issues in the 105th Congress
James R. Storey
Specialist in Social Legislation
Education and Public Welfare Division
Summary
The Taxpayer Relief Act of 1997 (P.L. 105-34) included provisions for greater tax
deferrals for individual retirement account (IRA) contributions, relaxed penalties on
early withdrawals, and new IRAs that pay tax-free benefits funded from after-tax
savings. The 5-year cost for the IRA provisions is an estimated $2.6 billion for FY1998-
FY2002. The 10-year cost ($21.9 billion) is much greater because the tax benefits of the
new “Roth” IRAs will be realized only when funds are withdrawn. Further changes to
IRAs have been proposed. Several technical revisions in IRA rules are included in the
Senate-passed version of the Internal Revenue Service Restructuring and Reform Act
of 1998 (H.R. 2676). Similar provisions were passed by the House in the Tax Technical
Corrections Act of 1997 (H.R. 2645).
Legislative History
In 1971, President Nixon proposed that workers be allowed to defer from taxable
income an amount of earnings set aside in an IRA. This idea was included in the
Employee Retirement Income Security Act (ERISA) of 1974 (P.L. 93-406), limited to
workers not covered by employer pension plans. Eligible workers could make tax-
deferred IRA contributions up to the lesser of $1,500 a year or 15% of earned income.
In 1981, President Reagan urged that all workers be allowed to have IRAs and that the
contribution limit be raised. The Economic Recovery Tax Act of 1981 (P.L. 97-34) raised
the limit to the lesser of $2,000 or 100% of earnings and made all workers eligible. A
total of $2,250 could be contributed by a worker and a nonworking spouse. The Tax
Reform Act of 1986 (P.L. 99-514) lowered income tax rates and broadened the taxable
income base. This base-broadening included a curb on tax deferrals for IRA
contributions, restricting deferrals to: (1) workers with no employer-sponsored retirement
plan; and (2) workers in employer plans who meet an income test. Married
accountholders with no employer coverage were treated as having employer coverage if
their spouses had such coverage.
Congressional Research Service ˜ The Library of Congress

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Over time, pressure built to restore tax deferrals, ease early withdrawal penalties, and
allow “backdoor” IRAs that receive taxable contributions and pay tax-free benefits. Three
times Congress passed bills that included these provisions but were vetoed. However, the
104
th Congress did enact penalty-free early withdrawals for certain health expenses (P.L.
104-191) and a higher contribution limit for nonworking spouses (P.L. 104-188).
More significant changes were realized with passage of the Taxpayer Relief Act of
1997 (P.L. 105-34). This law established a new “backdoor” IRA called a Roth IRA which
accepts only after-tax contributions but provides for tax-free distributions. It also raises
the income limits that determine tax deductibility for contributions to traditional IRAs by
accountholders who have employer pension coverage, and it allows a married
accountholder with no employer coverage to make deductible contributions independent
of the spouse’s coverage status. The 1997 law also established two new situations in
which penalty-free early withdrawals may be made: to pay for higher education expenses;
and to purchase a first home.
Rules for Tax Year 1998
Beginning in 1998, there are three types of IRAs: “deductible” IRAs, in which
income tax is deferred on both contributions and investment earnings until funds are
withdrawn; “nondeductible” IRAs, contributions to which are subject to current-year tax
but the investment earnings of which are tax-deferred; and “Roth” IRAs, contributions
to which are taxed but the investment earnings of which may be withdrawn tax free.
Anyone with earned income can contribute yearly the lesser of $2,000 or 100% of
earnings to an IRA. A spouse with little or no earnings can contribute up to $2,000 also,
but a couple’s combined contributions cannot exceed their earnings. The $2,000 limit
applies to the sum of a person’s contributions if contributions are made to multiple IRAs.
An IRA must be a separate trust account held by an approved financial institution. IRA
funds can be moved tax-free to another IRA once a year. Lump-sum distributions from
most employer plans can be transferred tax-free (rolled over) to deductible IRAs without
limit. IRAs can be invested in marketable securities, interest-bearing accounts, and
certain precious metals.
Contributions to a deductible IRA are subtracted from income before computing
income tax liability. A full $2,000 contribution can be deferred by an employed
individual only if: the worker is not covered by an employer-sponsored retirement plan;
or adjusted gross income (AGI) does not exceed $30,000 (single filer) or $50,000 (joint
filer). Filers may defer less than $2,000 if their AGI is less than $40,000 (single) or
$60,000 (joint). A worker’s nonworking spouse can defer a $2,000 contribution if joint
AGI does not exceed $150,000; partial deferral is allowed up to AGI of $160,000. Up to
$2,000 can be contributed to a Roth IRA by single filers with AGI of $95,000 or less and
by joint filers with AGI of $150,000 or less. Roth IRA eligibility phases out at AGI of
$110,000 (single) and $160,000 (joint).
Withdrawals from an IRA before age 59½ incur a 10% excise tax on any taxable
amounts withdrawn, unless the withdrawal is because of: death; disability; conversion

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of the asset to a lifetime annuity; medical expenses that exceed 7.5% of AGI; the need to
pay health insurance premiums while unemployed; higher education expenses; or
purchase of a first home. This 10% tax is in addition to income tax on the withdrawal.
Withdrawals must begin by April 1 of the year after the year that the accountholder
attains age 70½, at a rate that will consume the IRA over the expected remaining
lifespan(s) of accountholder (and beneficiary). Failure to make such withdrawals triggers
a 50% excise tax on the deficiency. Mandatory withdrawals are not required from Roth
IRAs.
A deductible IRA can be converted to a Roth IRA by persons with AGI no greater
than $100,000 (for single or joint filers), but income tax is due on transferred amounts not
already taxed. Amounts transferred in 1998 can be averaged over 4 years for tax
purposes, however.
Proposals in the 105 Congress
th
Many bills have been introduced to change IRA rules. The Taxpayer Relief Act of
1997 incorporated some of these proposals. The following discussion comments on
issues yet to be addressed. Table 1 arrays all introduced bills by type of change proposed.
“P.L. 105-34" is shown in boldface type under “House bill no.” for proposals included in
that law.)
Eligibility for IRA Tax Deferrals
Initially, IRA eligibility was quite limited. Participation rose quickly when all
workers became eligible in 1981 but fell sharply after deferrals were curbed in 1986. In
1995, 4.2% of tax filers with wage and salary income made tax-deferred contributions,
down from 18.6% in 1985. Contributions totalled $7.6 billion, down 80% from 1985.
However, IRA assets continued to grow as IRA investment earnings and rollovers from
employer retirement plans exceeded accountholders’ withdrawals. At the end of 1992,
IRA assets totalled $610 billion, 12% of all assets held in tax-deferred retirement plans.
Some advocates of retirement saving seek to reverse the trend of falling IRA
contributions.
Several arguments have been made to relax the limits on tax deferment of IRA
contributions: some people covered by employer plans retire with inadequate benefits;
workers denied tax deferment because their spouses had employer plan coverage did not
have the chance that other uncovered workers had for tax-deferred saving; the curb on
deferrals greatly reduced IRA saving, even by those eligible for full deferral, because
financial institutions had less reason to market IRAs; and inflation had shrunk the
population eligible for deferral. Had the $35,000 and $50,000 AGI limits for deferral
been indexed for inflation, they would have reached $49,573 and $70,819, respectively,
in 1997.
P.L. 105-34 raises the income limits for tax-deferral of IRA contributions over 10
years (Table 2). It eventually (in 2007) will widen the $10,000 phaseout interval for
deductibility to $20,000 for joint filers. However, this law does not offset the inflationary

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erosion in these limits. Some proposals, for example H.R. 446 (Representative Thomas),
would raise the income limits for deductibility to much higher levels.

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Table 1. IRA Proposals Introduced in the 105th Congress
IRA proposal
House bill no.
Senate bill no.
17, 83, 228, 446,
Expand deductibility
891, 1130, 105-34
2, 14, 197, 883
Allow partial credit of contribution in lieu of deduction
17, 1130
14
Reduce or eliminate linkage of deductibility to spouse’s coverage
2, 14, 180, 883,
by employer pension
17, 446, 105-34
889
Increase contribution limit
17, 228, 891
20
Increase nondeductible contribution limit
3225
83, 228, 446, 891,
Index contribution limit for inflation
1130, 3102
14, 197, 883
Allow tax-free withdrawal after age 59½ if funds given to charity
2821
1734
83, 228, 446, 553,
Allow penalty-free early withdrawal for higher education expenses
891, 1130, 105-34
2, 14, 197
83, 446, 615, 891,
Allow penalty-free early withdrawal when unemployed
1130, 3101
2, 197
83, 228, 446, 891,
Allow penalty-free early withdrawal for purchase of first home
1130, 105-34
14, 197
Allow penalty-free early withdrawal for long-term care expenses
83, 228
Allow penalty-free early withdrawal for medical expenses of lineal
83, 228, 891, 1130,
ancestors and descendants
3600
14, 197
Allow penalty-free early withdrawal to start a business
2
Allow penalty-free early withdrawal for adoption expenses
891, 2164
935
Apply withdrawal penalty after age 59½ if funds held less than 5
years
83, 1130
14
Repeal rule requiring mandatory withdrawals after age 70½
3079
Allow borrowing for certain purposes
228, 1123, 2026
Expand ability to invest in precious metals
446, 105-34
197
Allow investment in state prepaid tuition programs
83
Exclude inherited IRA from taxable estate
228
Allow rollover of farm sale proceeds to IRA
1518
20, 80
Set early withdrawal tax to 25% for rollover IRA held less than 2
years
3101
Establish payroll deduction as means for IRA contribution
1130, 3672
14, 883, 889
Authorize “backdoor” IRA
83, 446, 105-34
2, 197, 883
Allow conversion of regular IRA to “backdoor” IRA
83, 446, 105-34
2, 197, 883

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Table 2. AGI Limits for Full IRA Deductibility Under P.L. 105-34a
Tax year
Single filer
Joint filer
Tax year
Single filer
Joint filer
1998
$30,000
$50,000
2003
$40,000
60,000
1999
31,000
51,000
2004
45,000
65,000
2000
32,000
52,000
2005
50,000
70,000
2001
33,000
53,000
2006
50,000
75,000
2002
34,000
54,000
2007 & later
50,000
80,000
These
a
AGI limits apply to accountholders who have employer pension coverage. There are no limits for
single filers who lack such coverage. For joint filing units in which only one spouse has employer
coverage, the limits shown here apply only to the covered spouse. Full deductibility is allowed for the
uncovered spouse up to AGI of $150,000, effective for 1998 and later years.
The new law ends the denial of tax deferrals to those whose spouses have employer
plan coverage if an income limit is met. That is, if only one spouse in a joint filing unit
has employer coverage, the uncovered spouse can deduct contributions fully if the unit’s
AGI is below $150,000, or partially if AGI is below $160,000.
Annual IRA Contribution Limits
Unlike contribution limits for employer plans, the $2,000 IRA limit is not adjusted
for inflation. Had the original $1,500 limit been adjusted, it would have been $4,486 in
1997. The $1,500 limit was raised to $2,000 in 1981. Had that limit been adjusted, it
would have reached $3,540 in 1997. P.L. 105-34 did not change the limit, but several
bills would do so. H.R. 3102 (Representative Neal) would index the $2,000 limit for
inflation. H.R. 891 (Representative Saxton) would increase the limit in steps to $7,000
and then index it.
Penalties for Early Withdrawals from IRAs
A 10% early withdrawal tax discourages the premature use of IRA assets. P.L. 105-
34 expands penalty-free withdrawals by allowing them for higher education expenses and
first-home purchases. Penalty-free education withdrawals cannot exceed higher education
expenses less scholarships received. There is a lifetime limit of $10,000 on home-
purchase withdrawals. Further proposals still pending for penalty-free withdrawals would
allow them for: long-term care expenses (H.R. 228), medical expenses of relatives (H.R.
3600), and adoption expenses (S. 935).
Roth IRAs
The new law allows after-tax contributions up to $2,000 to “Roth” IRAs. This limit
is phased out for AGI in excess of $95,000 (single filers) or $150,000 (joint filers),
reaching $0 at $110,000 (single) or $160,000 (joint). Unlike traditional IRAs,
contributions to Roth IRAs can continue after age 70½. Withdrawals of contributions and
investment earnings are tax free for funds held at least 5 years if withdrawals are made
after age 59½, upon the accountholder’s death or disability, or to buy a first home.

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The Internal Revenue Service Restructuring and Reform Act of 1998 (H.R. 2676)
includes several technical changes to Roth IRAs. One provision, effective in 2005, would
make it easier for a person over age 70½ to convert a deductible IRA into a Roth IRA by
disregarding from AGI any IRA distributions required by the person’s age in applying the
$100,000 eligibility income limit for such conversions. This bill also includes several
technical corrections to the language in P.L. 105-34 that authorized Roth IRAs.
Other IRA Issues
P.L. 105-34 broadened allowable IRA investments in precious metals to include
bullion, increased the tax on prohibited transactions from 10% to 15%, and permanently
repealed the 15% tax on large withdrawals retroactive to January 1, 1997. This tax on
annual withdrawals in excess of $160,000 and lump-sum withdrawals of more than
$800,000 had already been waived through 1999 by P.L. 104-188. Other issues addressed
by introduced bills include: tax-free withdrawals after age 59½ for IRA funds donated
to charities (H.R. 2821, S. 1734); repeal of required minimum withdrawals after age 70½;
and authorization of loans from IRAs for certain purposes (H.R. 2026).
Economic and Budgetary Issues Raised by IRAs
Experts worry that workers are not saving enough for retirement. Would expanded
IRAs yield more retirement saving? The May 1993 Current Population Survey found that
12% of workers with no employer pension coverage had IRAs, compared to 25% with
such coverage. Thus, the prime IRA target group, those with no employer pensions, saved
less in IRAs than did others. Raising the contribution limit might produce more saving
by those who have IRAs while encouraging few noncontributors to open IRAs. Relaxing
early withdrawal rules might attract new contributors, but preretirement use of savings
probably would rise. Broader eligibility for tax deferral would prompt more saving,
especially in the higher tax brackets. However, some new IRA saving would consist of
savings that would have occurred anyway without new tax breaks.
Some argue against larger IRA tax deferrals because the lost revenue is likely to
benefit mainly higher-income workers, who are also more likely to have employer
pensions. The highly paid have more disposable income from which to save and realize
larger benefits from tax deferral. In 1985, a year before deferrals were limited, only 8%
of tax filers with AGI between $10,000 and $20,000 reported IRA contributions,
compared to 58% of filers with AGI above $50,000.
Deferring income tax on IRA contributions and investment earnings constitutes an
opportunity cost to government since the deferred revenue is unavailable to pay current
obligations. This IRA “tax expenditure” was worth $9.3 billion for FY1997. For
FY1998-FY2002, IRA provisions in P.L. 105-34 are estimated to cost another $2.6
billion. The new Roth IRAs do not add to short-run costs, but critics argue that their
budget impact simply is postponed. In the short run, Roth IRAs will attract more taxable
saving and will yield a revenue windfall as some accountholders convert old IRAs to Roth
IRAs and pay tax on the transferred amounts. However, large revenue losses will occur
later when investment earnings are withdrawn tax free. Indeed, the 10-year cost for the
IRA provisions of P.L. 105-34 is estimated to be $21.9 billion, or eight times the 5-year
cost.

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