Order Code RL30255
Report for Congress
Received through the CRS Web
Individual Retirement Accounts (IRAs):
Issues and Proposed Expansion
Updated March 11, 2003
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Individual Retirement Accounts (IRAs):
Issues and Proposed Expansions
Summary
The Taxpayer Relief Act of 1997 increased benefits available under individual
retirement accounts and provided for a particular type of account called a Roth IRA.
President Clinton had subsequently proposed a provision that was particularly
directed at lower income individuals (Retirement Savings Accounts). The 2001 tax
cut liberalized contribution limits (but not income limits) for IRAs and added a
temporary savings credit directed at lower income individuals. In 2003, President
Bush proposed to combine all IRAs into Roth types and to remove income limits.
(Special accounts dedicated to education are not considered in this paper).
Deductible contributions to IRAs can currently be made by individuals not
covered by a pension plan and, under the 1997 revisions, to individuals with a plan
up to an income limit. (Accounts with tax deferrals are available to everyone). The
treatment is similar to that of a pension plan–contributions are deducted and
withdrawals are taxed. This approach is also called a deductible or “front-loaded”
account. The 1997 legislation also allowed a new type of IRA (the Roth IRA), where
contributions are not deductible, but no tax is imposed on withdrawal (similar to the
treatment of a tax exempt bond). This approach is also called a non-deductible or
“back-loaded” plan. Both IRAs have income limits, with the limits higher for Roth
IRAs. Back-loaded accounts are similar to front-loaded approaches in that they
effectively exempt income from taxation under certain circumstances but differ in
several ways including the structure of penalties for early withdrawals.
The major argument for IRAs is that they will increase private savings. In
general, however, neither conventional economic theory nor the empirical evidence
on savings effects tends to support an expectation that increased IRA contributions
are primarily new savings. Back-loaded accounts are less likely to induce new
private savings than are front-loaded ones. Recent evidence of the uncertainty of
increasing savings with a higher rate of return is the juxtaposition of high returns in
the stock market with a dramatic reduction in the personal savings rate. This fall in
the savings rate in the face of high returns provides some evidence that expanded
IRAs will not be successful in increasing savings rates.
Because of rollovers, phased in income limits, and the initial small
accumulations of contributions in back-loaded plans, the 1997 IRA expansion had
a very small revenue cost in the first few years, but will cost much more in the future.
The cost of the Administration’s proposal will also grow over time. IRA provisions
are also viewed as a middle class savings plan. Although plans are phased out for
very high income individuals, the participation in 1981-1986 when there were no
income limits was largely by the upper part of the income distribution; a limit
increase and income increase will be more focused on higher income individuals.
The Clinton Administration’s RSA plan had larger per dollar subsidies, that are
more limited in size and income eligibility than IRA expansion. RSA benefits would
have been more targeted than IRAs to lower and moderate income individuals. This
report will be updated as legislative developments warrant.

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Contents
Current Rules Regarding Individual retirement Accounts . . . . . . . . . . . . . . . . . . . 2
Tax Benefits of IRAs: Front-Loaded and Back-Loaded . . . . . . . . . . . . . . . . . . . . 3
Equivalence of Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Differences in Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Variations in Tax Rates over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Dollar Ceilings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Non-Qualified Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Timing of Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Savings Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Revenue Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Distributional Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Administrative Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Policy Advantages of Front- vs. Back-Loaded IRAs . . . . . . . . . . . . . . . . . . . . . . 11
New Proposals and Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Expanding IRAs vs. Accounts Directed at Lower Income Individuals . . . . 12
Differences Between IRA Expansion and
Benefits Directed to Lower Income Individuals . . . . . . . . . . . . . 13
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Appendix: A History of IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

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Individual Retirement Accounts (IRAs):
Issues and Proposed Expansions
The 1997 budget agreement between the President and congressional leaders
allowed for a tax cut, and both the President’s proposal, and the House and Senate
versions of the bill included an expansion of Individual Retirement Accounts (IRAs),
which was ultimately adopted as part of the Taxpayer Relief Act of 1997. The
proposal expanded the availability of existing deductible IRAs to higher income
individuals and offered an alternative “back-loaded” plan (Roth IRA) which did not
allow a deduction for contributions but imposed no tax on withdrawals.
The bill also adopted some tax favored educational savings accounts similar to
IRAs; these accounts are not considered in this paper.
Several proposals were made after the 1997 revisions. Congressional proposals
in 1999 would have increased contribution limits and income limits for Roth IRAs;
these were passed by both houses but vetoed.. President Clinton proposed a
different plan, to institute Retirement Savings Accounts (RSAs) that would involve
refundable tax credits to be deposited into retirement accounts targeted at lower
income individuals.

The tax cut bill for 2001, H.R. 1836 included increases in IRA limits to $5,000
by 2008 with indexing for inflation thereafter. These provisions cost $25.1 billion
over twenty years. The provisions in the bill sunset after 2010. The bill also included
a provision with credits for IRAs aimed at lower income individuals, but these credits
are not refundable and sunset in 2006. The credits, which applied to both IRAs and
elective deferrals, cost $9.9 billion during the five years it is effective.

In the 107th Congress, the House passed legislation to make most of the
provisions of H.R. 1836 permanent. In addition, general concerns about stock market
performance and the slowly growing economy also led to the consideration of an
investor relief package (H.R. 5553) which included speedups in IRA and pension
contribution limit increases, as well as an increase in the age at which distributions
from IRAs must begin. These proposals may be reconsidered in the 108th Congress.
President Bush has recently proposed a major revision in the treatment of IRAs.
All IRAs would be combined into a single Roth-style IRAs. Two different types of
accounts, retirement and lifetime (with the later not subject to early withdrawal
penalties) would be allowed. Limits would be increased: $7,500 could be contributed
to either plan. Income limits would be removed. The plan would also make most
provisions of the 2001 tax cut permanent, but not the credit for lower income
individuals.

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CRS-2
This report provides background information on IRAs, including a description
of current law, a discussion of the magnitude and nature of tax benefits incurred, and
discussions of the effects on savings, the distribution of benefits, the revenue costs,
and the administrative costs. The final section discusses new proposals. The
Appendix contains a history of the development of IRAs.
Current Rules Regarding Individual
Retirement Accounts
Eligible individuals can contribute up to $3,000 to IRAs. There are two
different types of IRAs available, and the $3,000 limit applies to the total contributed
to both types. The traditional, front-loaded, IRA allows a deduction for contributions
to an IRA, and taxes are not paid until funds are withdrawn. This tax treatment is
similar to the treatment of private pension. The back-loaded, or Roth, IRA does not
allow a deduction, but applies no tax to the earnings; its treatment is similar to that
of a tax exempt bond.
IRA limits increased from $2,000 to $3,000 in 2002-2004, to $4,000 in 2005-
2007 and $5,000 in 2008. Limits will then be indexed for inflation. Limits for
individuals over 50 will increase a further $500 in 2002 and $1,000 in 2006.
Eligible individuals are those not covered by employer plans (or whose spouses
are not covered by employer plans) and those covered by employer plans with
incomes below certain phase-out ranges (where the ceiling on contributions is
gradually reduced to zero), which differ between the two types of IRAs.
For deductible IRAs, for joint returns, the phase-out was $50,000 to $60,000 for
1998, increased by $1,000 for the next 4 years, is $60,000 to $70,000 in 2003,
$65,000 to $75,000 in 2004, $60,000 to $80,000 in 2005, $75,000 to $85,000 in 2006
and $80,000 to $100,000 in 2007. For single taxpayers, the phase-out is $30,000 to
$40,000 in 1998, increased by $1000 for the next 4 years, is $40,000 to $50,000 in
2003, $45,000 to $55,000 in 2004, and $50,000 to 60,000 in 2005 and after. An
individual whose spouse is an active participant in an employer plan is eligible for
an IRA that is phased out between $150,000 and $160,000.
Individuals not eligible for the deductible IRA can nevertheless make
nondeductible contributions to a traditional IRA; taxes on the earnings are not due
until funds are withdrawn. This treatment is not as beneficial as the full IRA
treatment.
The maximum contribution for back-loaded (Roth) IRAs is considerably higher.
It is phased out for individuals a $95,000 to $110,000 and for joint filers at $150,000
to $160,000.
Contributions are limited to $3,000 or total earnings, whichever is less;
contributions could also be made for a non-working spouse (but total contributions
for a married couple could not exceed total earnings).

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A 10% penalty is imposed on taxable amounts withdrawn before age 59 and ½,
except in cases of death and disability, unless used for certain specified purposes
(certain medical expenses, higher education and first-time home buyer expenses).
Withdrawals from traditional, or front-loaded, IRAs must commence at age 70 and
½. (See CRS Report 96-20 EPW, for further details on the tax treatment of IRAs.)
Amounts can be transferred from traditional to Roth IRAs for individuals with
incomes below $100,000, and there is an initial deferral of tax during the first 4 years
after enactment.
Amounts in current IRAs could have been withdrawn and placed into the
nondeductible IRAs without penalty prior to 1999. Amounts rolled over must have
been included in income in equal increments over 4 years.
Tax Benefits of IRAs:
Front-Loaded and Back-Loaded
The two types of IRAs–front-loaded (deductible) and back-loaded
(nondeductible)–are equivalent in one sense, but different in other ways. They are
equivalent in that they both effectively exempt the return on investment from tax in
certain circumstances.
A 10% early withdrawal penalty applies to non-qualified withdrawals, which are
generally withdrawals before age 59 and ½. (Certain withdrawals for specific
purposes circumstances are not subject to the penalty tax; see CRS Report 97-935,
Individual Retirement Accounts (IRAs): Changes Made by the Taxpayer Relief Act
of 1997 for details.) No minimum distribution requirements apply to Roth IRAs.
Taxes and penalties would not apply until the original contribution is recovered, and
all IRAs would be aggregated for this purpose.
Equivalence of Types
A back-loaded IRA is just like a tax-exempt bond; no tax is ever imposed on
the earnings.
Assuming that tax rates are the same at the time of contribution and withdrawal,
a deductible, or front-loaded, IRA offers the equivalent of no tax on the rate of return
to savings, just like a back-loaded IRA. The initial tax benefit from the deduction is
offset, in present value terms, by the payment of taxes on withdrawal. Here is an
illustration. If the interest rate is 10%, $100 will grow to $110 after a year – $100 of
principle and $10 of interest. If the tax rate is 25%, $2.50 of taxes will be paid on the
interest, and the after-tax amount will be $107.50, for an after-tax yield of 7.5%.
With a front-loaded IRA, however, the taxpayer will save $25 in taxes initially from
deducting the contribution, for a net investment of $75. At the end of the year, the

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$110 will yield $82.50 after payment of 25% in taxes, and $82.50 represents a 10%
rate of return on the $75 investment.1
Differences in Treatment
There are, nevertheless, three ways in which these tax treatments can differ – if
tax rates vary over time, if the dollar ceilings are the same, and if premature
withdrawals are made. There are also differences in the timing of tax benefits that
have some implications for individual behavior as well as revenue costs.
Variations in Tax Rates over Time. The equivalence of front-loaded and
back-loaded IRAs only holds if the same tax rate applies to the individual at the time
of contribution and the time of withdrawal in the case of front-loaded IRAs. If the
tax rate is higher on contribution than on withdrawal, the tax rate is negative. For
example, if the tax rate were zero on withdrawal in the previous example, the return
of $35 on a $75 investment would be 46%, indicating a large subsidy to raise the rate
of return from 10% to 46%. Conversely, a high tax rate at the time of withdrawal
relative to the rate at the time of contribution would result in a positive tax rate. If
tax rates are uncertain, and especially if it is possible that the tax rate will be higher
in retirement, the benefits of a front-loaded IRA are unclear.
Dollar Ceilings. A given dollar ceiling that is binding for an individual for
a back-loaded IRA is more generous than for a front-loaded one. If an individual has
$2,000 to invest and the tax rate is 25%, all of the earnings will be tax exempt with
a back-loaded IRA, but the front-loaded IRA is equivalent to a tax free investment
of only $1500; the individual would have to invest the $500 tax savings in a taxable
account to achieve the same overall savings, but will end up with a smaller amount
of after tax funds on withdrawal.
Another way of explaining this point is to consider a total savings of $2,000,
which, under a back-loaded account with an 8% interest rate would yield $9321 after,
say, 20 years. With a front loaded IRA, an interest rate of 8% and a 25% tax rate (so
$2000 would be invested in an IRA and the $500 tax savings invested in a taxable
account) the yield would be $8595 in 20 years. In order to make a back-loaded IRA
equivalent to a front loaded one, the back-loaded IRA would need to be 75% as large
as a front-loaded one. (Since the relative size depends on the tax rate, the back-loaded
IRA is more beneficial to higher income individuals than a front-loaded IRA, other
things equal, including the total average tax benefit provided).
The importance of the dollar ceiling will diminish with the increase in
contribution limits, which will eventually rise to $5,000.
1 The current treatment for those not eligible for a deductible IRA–a deferral of tax–results
in a partial tax, depending on period of time the asset is held and the tax rate on withdrawal.
In our example, a deferral would produce an effective tax rate of 18% if held in the account
for 10 years, and a tax rate of 13% if held for 20 years.

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Non-Qualified Withdrawals. Front-loaded and back-loaded IRAs differ in
the tax burdens imposed if non-qualified withdrawals are made (generally before
retirement age). This issue is important because it affects both the willingness of
individuals to commit funds to the account that might be needed before retirement
(or other eligibility) and the willingness to draw out funds already committed to an
account.
The front-loaded IRA provides steep tax burdens for early year withdrawals
which decline dramatically because the penalty applies to both principal and interest.
(Without the penalty, the effective tax rate is always zero). For example, with a 28%
tax rate and an 8% interest rate, the effective tax burden is 188% if held for only a
year, 66% for 3 years and 40% for 5 years. At about 7 years, the tax burden is the
same as an investment made in a taxable account, 28%. Thereafter, tax benefits
occur, with the effective tax rate reaching 20% after 10 years, 10% after 20 years and
7% after 30 years. These tax benefits occur because taxes are deferred and the value
of the deferral exceeds the penalty.
The case of the back-loaded IRA is much more complicated. First, consider the
case where all such IRAs are withdrawn. In this case, the effective tax burdens are
smaller in the early years. Although premature withdrawals attract both regular tax
and penalty, they apply only to the earnings, which are initially very small. In the
first year, the effective tax rate is the sum of the ordinary tax rate (28%) and the
penalty (10%), or 38%. Because of deferral, the effective tax rate slowly declines
(36% after 3 years, 34% after 5 years, 30% after 10 years). In this case, it takes 13
years to earn the same return that would have been earned in a taxable account.2
Partial premature withdrawals will be treated more generously, as they will be
considered to be a return of principal until all original contributions are recovered.
This treatment is more generous than the provisions in the original Contract with
America, where the reverse treatment occurred: partial premature withdrawals would
be treated as income and fully taxed until the amount remaining in the account is
equal to original investment.
These differences suggest that individuals should be much more willing to put
funds that might be needed in the next year or two for an emergency in a back-loaded
account than in a front-loaded account, since the penalties relative to a regular
savings account are much smaller. These differences also suggest that funds might
be more easily withdrawn from back-loaded accounts in the early years even with
penalties. This feature of the back-loaded account along with the special tax-favored
withdrawals make these tax-favored accounts much closer substitutes for short-term
savings not intended for retirement.
2 These patterns are affected by the tax rate. For example, with a 15% tax rate, it takes
longer for the IRA to yield the same return as a taxable account because penalties are larger
relative to the regular tax rate–11 years for a front-loaded account and 19 years for a back-
loaded one. In both cases, however, the back-loaded IRA has smaller initial tax burdens that
decline more slowly and take longer to break-even by comparison with taxable investments.

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It could eventually become more costly to make premature withdrawals from
back-loaded accounts than from front-loaded accounts. Consider, for example,
withdrawal in the year before retirement for all funds that had been in the account for
a long time. For a front-loaded IRA, the cost is the 10% penalty on the withdrawal
plus the payment of regular tax one year in advance – both amounts applying to the
full amount. For a back-loaded account, where no tax or penalty would be due if
held until retirement, the cost is the penalty plus the regular tax (since no tax would
be paid for a qualified withdrawal) on the fraction of the withdrawal that represented
earnings, which would be a large fraction of the account if held for many years.
(Proposed new rules that allow principal to be withdrawn first would allow
individuals to withdraw substantial amounts prior to retirement without any tax,
however.)
Timing of Effects. The tax benefit of the front-loaded IRA is received in the
beginning, while the benefit of the back-loaded IRA is spread over the period of the
investment. These differences mean that the front-loaded IRA is both more costly
than the back-loaded one in the short run (and therefore in the budget window) and
that a front-loaded IRA is more likely to increase savings. These issues are discussed
in the following two sections.
Receiving the tax benefit up front might also make individuals more willing to
participate in IRAs because the benefit is certain (the government could, in theory,
disallow income exemptions in back-loaded IRAs already in existence).
Some have argued that the attraction of an immediate tax benefit has played a
role in the popularity of IRAs and may have contributed to increased savings (see the
following discussion of savings).
Savings Effects
There has been an extensive debate about the effect of individual retirement
accounts on savings.3
3 For a more complete discussion of the savings literature, see Jane G. Gravelle. The
Economic Effects of Taxing Capital Income, Cambridge, Mass., MIT Press, 1994, p. 27 for
a discussion of the general empirical literature on savings and pp. 193-197 for a discussion
of the empirical studies of IRAs. Subsequent to this survey, a new paper by Orazio P.
Attanasio and Thomas C. DeLeire, The Effect of Individual Retirement Accounts on
Household Consumption and National Savings, Economic Journal, V. 112, July 2002, (p.
504-538) was published. That study found little evidence that IRAs increased savings. For
additional surveys see the three articles published in the Fall 1996 Journal of Economic
Perspectives, (vol. 10): R. Glenn Hubbard and Jonathan Skinner, “Assessing the
Effectiveness of Savings Incentives,” (p. 73-90); James M. Poterba, Steven F. Venti and
David A. Wise, “How Retirement Savings Programs Increase Saving,” (p. 91-113): Eric M.
Engen, William G. Gale, and John Karl Scholz, “The Illusory Effects of Savings Incentives
on Saving,” (p. 113-138). An International Monetary Fund working paper by Alun Thomas
and Christopher Towe, U.S. Private Saving and the Tax Treatment of IRA/401(k)s: A Re-
examination Using Household Saving Data (August 1996) found that IRAs did not increase
(continued...)

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Conventional economic analysis and general empirical evidence on the effect
of tax incentives on savings do not suggest that IRAs would have a strong effect on
savings. In general, the effect of a tax reduction on savings is ambiguous because of
offsetting income and substitution effects. The increased rate of return may cause
individuals to substitute future for current consumption and save more (a substitution
effect), but, at the same time, the higher rate of return will allow individuals to save
less and still obtain a larger target amount (an income effect). The overall
consequence for savings depends on the relative magnitude of these two effects.
Empirical evidence on the relationship of rate of return to saving rate is mixed,
indicating mostly small effects of uncertain direction. In that case, individual
contributions to IRAs may have resulted from a shifting of existing assets into IRAs
or a diversion of savings that would otherwise have occurred into IRAs.
Recent evidence of the uncertainty of increasing savings with a higher rate of
return is the juxtaposition of high returns in the stock market with a dramatic
reduction in the personal savings rate. This fall in the savings rate in the face of high
returns provides some evidence that expanded IRAs will not be successful in
increasing savings rates.
The IRA is even less likely to increase savings because most tax benefits were
provided to individuals who contributed the maximum amount – eliminating any
substitution effect at all. (Note that over time, however, one might expect fewer
contributions to be at the limit as individuals run through their assets). For these
individuals, the effect of savings is unambiguously negative, with one exception. In
the case of the front-loaded, or deductible IRA, savings could increase to offset part
of the up-front tax deduction, as individuals recognize that their IRA accounts will
involve a tax liability upon withdrawal. The share of IRAs that were new savings
would depend on the tax rate–with a 28% tax rate, one would expect that 28% would
be saved for this reason; with a 15% tax rate, 15% would be saved for this reason.
This effect does not occur with a back-loaded or nondeductible IRA. Thus,
conventional economic analysis suggests that private savings would be more likely
to increase with a front-loaded rather than a back-loaded IRA.
Despite this conventional analysis, some economists have argued that IRA
contributions were largely new savings. The theoretical argument has been made that
the IRAs increase savings because of psychological, “mental account,” or advertising
reasons. Individuals may need the attraction of a large initial tax break; they may
need to set aside funds in accounts that are restricted to discipline themselves to
maintain retirement funds; or they may need the impetus of an advertising campaign
to remind them to save. There has also been some empirical evidence presented to
3 (...continued)
private household saving. A study by Eric M. Engen (Federal Reserve Board)and William
G. Gale (Brookings Institution) found that 401(k) plans, which are similar to IRAs in some
ways, did not have much effect on savings. See “Debt, Taxes, and the Effects of 401(k)
Plans on Household Wealth Accumulation, May 1997. A recent simulation study in the
American Economic Review, while not based on direct empirical evidence, suggests only a
small fraction of IRA contributions represent net savings. See Ayse Imrohoroglu, Selahattin
Imrohoroglu, and Douglas H. Joines, “The Effect of Tax-Favored Accounts on Capital
Accumulation,” (vol. 88, September 1998, pp. 749-768).

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suggest that IRAs increase savings. This evidence consists of (1) some simple
observations that individuals who invested in IRAs did not reduce their non-IRA
assets and (2) a statistical estimate by Venti and Wise that showed that IRA
contributions were primarily new savings.4
The fact that individuals with IRAs do not decrease their other assets does not
prove that IRA contributions were new savings; it may simply mean that individuals
who were planning to save in any case chose the tax-favored IRA mechanism. The
Venti and Wise estimate has been criticized on theoretical grounds and another study
by Gale and Scholz using similar data found no evidence of a savings effect.5 A
study by Manegold and Joines comparing savings behavior of those newly eligible
for IRAs and those already eligible for IRAs found no evidence of an overall effect
on savings, although increases were found for some individuals and decreases for
others; a study by Attanasio and DeLeire also using this approach found little
evidence of an overall savings effect.6 And, while one must be careful in making
observations from a single episode, there was no overall increase in the savings rate
during the period that IRAs were universally available, despite large contributions
into IRAs. Similarly, the household savings rate continued (and actually accelerated)
its decline after expansion of IRAs in 1997.7
It is important to recognize that this debate on the effects of IRAs on savings
concerned the effects of front-loaded, or deductible IRAs. Many of the arguments
that suggest IRAs would increase savings do not apply to back-loaded IRAs such as
the Roth IRA. For example, back-loaded IRAs do not involve the future tax liability
that, in conventional analysis, should cause people to save for it.
Indeed, based on conventional economic theory, there are two reasons that the
introduction of back-loaded IRAs may decrease savings. First, those who are newly
eligible for the benefits should, in theory reduce their savings, because these
individuals are higher income individuals who are more likely to save at the limit.
The closer substitutability of IRAs with savings for other purposes would also
increase the possibility that IRA contributions up to the limit could be made from
existing savings. Secondly, those who are currently eligible for IRAs who are
switching funds from front-loaded IRAs or who are now choosing back-loaded IRAs
4 This material has been presented by Steve Venti and David Wise in several papers; see
for example, Have IRAs Increased U.S. Savings?, Quarterly Journal of Economics, v. 105,
August, 1990, pp. 661-698.
5 See William G. Gale and John Karl Scholz, IRAs and Household Savings, American
Economic Review, December 1994, pp. 1233-1260. The most detailed explanation of the
modeling problem with the Venti and Wise study is presented in Jane G. Gravelle, Do
Individual Retirement Accounts Increase Savings? Journal of Economic Perspectives, Vol.
5, Spring 1991, pp. 133-148.
6 See Douglas H. Joines and James G. Manegold, IRAs and Savings: Evidence from a Panel
of Taxpayers, University of Southern California; Orazio P. Attanasio and Thomas C.
DeLeire, IRA’s and Household Saving Revisited: Some New Evidence, National Bureau
of Economic Research Working Paper 4900, October 1994.
7 See CRS Report RS20224, The Collapse of Household Savings: Why Has It Happened and
What Are Its Implications? By Brian Cashell and Gail Makinen, June 7, 1999.

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as a substitute for front-loaded ones should reduce their savings because they are
reducing their future tax liabilities.
Also, many of the “psychological” arguments made for IRAs increasing savings
do not apply to the back-loaded IRA. There is no large initial tax break associated
with these provisions, and the funds are less likely to be locked-up in the first few
years because of the penalty applying to withdrawals is much smaller. In addition,
funds are not as tied up because of the possibility of withdrawing them for special
purposes, including ordinary medical expenses.
Overall, the existing body of economic theory and empirical research does not
make a convincing case that the expansion of individual retirement accounts,
particularly the back-loaded accounts which were included in the recent legislation,
will increase savings.
Revenue Effects
The revenue loss from IRAs varies considerably over time.8 For a back-loaded
IRA, the cost grows rapidly over time and the long-run revenue cost (in constant
income levels) is about eight times as large as in the first 5 years, even with no
rollovers from existing accounts allowed. Front-loaded IRAs also have an uneven
pattern of revenue cost, although they are characterized by a rise to a peak (as
withdrawals occur) and then a steady state cost that could be a third or so larger than
in the first 5 years. The losses from restoring IRA coverage for everyone could
eventually amount to $11 billion a year or so, or $66 billion for 5 years, in current
income levels.9
The IRA proposal costs are also affected by the provision allowing a rollover
of existing front-loaded IRAs into back-loaded IRAs over a 4-year period. This
effect raises tax revenue in the short run although, of course, the rollover will result
in lost revenues (with interest) in future years.
Some indication of this pattern can be seen from the 11-year estimates (fiscal
years) of the cost of IRA provisions introduced in 1997. The costs beginning with
8 See Jane G. Gravelle, Testimony before the Committee on Finance, Subcommittee on
Deficits, Debt Management and International Debt, United States Senate, April 12, 1991 and
Jane G. Gravelle, Estimating the Long-Run Revenue Effects of Tax Law Changes, Eastern
Economic Journal, Vol. 19, No. 4, Fall 1993, for analysis of the long run revenue costs of
IRAs.
9 This is an estimate of the long-run cost of S. 612 in 1991 which allowed a choice between
front-loaded and back-loaded IRAs (assuming that half went into each) provided in a
Congressional Research Service memorandum by Jane G. Gravelle dated March 5, 1992.
Since current IRAs are relatively small and the allocation between types does not matter
very much, an estimate of similar magnitude might be made for the 1997 revisions.

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CRS-10
FY1998 (in billions) were $0.4, $0.4, then a gain of $0.1, then a cost of $0.4, $0.9,
$1.8, $3.3, $3.8, $4.4, and $5.0 billion.10
The IRA provisions, therefore, were projected ultimately to result in a significant
annual revenue loss.11
Thus, the revenue losses in the initial period understates the losses that will
occur in the long run due to the shift to back-loaded accounts. The long phase-in of
increased limits for deductible IRAs also causes costs to be lower in the short run.
The increases in IRA limits enacted in 2001 are estimated to increase revenue
costs by $2.1 trillion in 2011 and $25.1 trillion for the years 2001-2011.
Revenue estimates for the administration’s current proposals, which cost about
$15 billion over ten years and about $3 billion in the tenth year did not show the
rapidly growing revenue pattern projected in 1997. However, this proposal’s long
run revenue costs may be obscured for an extended period of time by the possibility
of diverting funds that would otherwise have been invested by traditional IRAs
(which are no longer allowed) and by diverting monies from elective deferral plans
(e.g. 401k plans) to the more liberally treated lifetime savings accounts, where there
are no penalties on withdrawal. These shifts raise revenue in the short run, but lose
more money in the long run.
Distributional Effects
Who benefitted from the expansion of IRAs? In general, any subsidy to savings
tends to benefit higher income individuals who are more likely to save. The benefits
of IRAs for high income individuals are limited, however, compared to many other
savings incentives because of the dollar limits. Nevertheless, the benefits of IRAs
when universally allowed tended to go to higher income individuals. In 1986, 82%
of IRA deductions were taken by the upper third of individuals filing tax returns
(based on adjusted gross income); since these higher income individuals had higher
marginal tax rates, their share of the tax savings would be larger.
In addition, when universal IRAs were available from 1981-1986, they were
nevertheless not that popular. In 1986, only 15% of tax returns reported
contributions to IRAs. Participation rates were lower in the bottom and middle of the
income distribution: only 2% of taxpayers in the bottom third of tax returns and only
9% of individuals in the middle third contributed to IRAs. Participation rose with
income: 33% of the upper third contributed, 54% of taxpayers in the top 10%
contributed, and 70% of taxpayers in the top 1% contributed.
10 Conference Report to Accompany H.R. 2014, the Taxpayer Relief Act of 1997, July 30,
1997. Report 105-220, U.S. Congress, House, 105th Congress, 1st Session.
11 If IRAs were all new savings, there would be no revenue cost except for the initial gain
from rollover of existing IRAs followed by a future loss because any earnings on IRAs
would be net additions to income. As indicated in the previous section, however, the
empirical evidence does not support this view.

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CRS-11
The expansion of IRAs was even more likely to benefit higher income
individuals because lower income individuals are already eligible for front loaded
(deductible) IRAs that confer the same general tax benefit. Less than a quarter of
individuals (1993 data) had incomes too large to be eligible for any IRA deduction
(because they are above $50,000 for married individuals and $35,000 for singles) and
less than a third exceed the beginning of the phase-out range. Also, those higher
income individuals not already covered by a pension plan were also eligible.
Therefore, only higher income individuals who did not otherwise have tax benefits
from pension coverage were excluded from IRA coverage before the 1997 revisions.
Overall, expansion of IRAs as occurred in 2001 tends to benefit higher income
individuals, although the benefits are constrained for very high income individuals
because of the dollar ceilings and because of income limits. An expansion in dollar
limits would be more focused, however, on higher income individuals who are more
likely to be contributing at the limit and more likely to take full advantage of higher
limits. The administration’s proposal would be particularly beneficial to high income
individuals because this provision would remove the income limits.
Administrative Issues
The more types of IRAs that are available, the larger the administrative costs
associated with them. With the introduction of back-loaded accounts, three types of
IRAs exist–the front-loaded that have been available since 1974 (and universally
available in 1981-1986), the non-deductible tax deferred accounts available in prior
law to higher income individuals and that are now superseded by more tax preferred
plans for all but a very high income group and the new back-loaded accounts.
Treatment on withdrawal will also be more complex, since some are fully taxable,
some partially taxable, and some not taxable at all.
Another administrative complexity that will arise is the possibility of
withdrawals prior to retirement for special purposes, including education and first
time home purchase.
The administration proposal should simplify treatment in the long run by
providing a single type of plan (although certain special types of IRAs are retained).
Policy Advantages of Front- vs. Back-Loaded IRAs
Most individuals now have a choice between a front-loaded and a back-loaded
IRA. An earlier section discussed the relative tax benefits of the alternatives to the
individual. This section discusses the relative advantages and disadvantages to these
different approaches in achieving policy objectives.
From a budgetary standpoint, the short-run estimated cost of the front-loaded
IRA provides a more realistic picture of the eventual long-run budgetary costs of
IRAs than does the back-loaded. This issue can be important if there are long run
objectives of balancing the budget or generating surpluses, which can be made more

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difficult if the costs of IRAs are rising. In addition, if distributional tables are based
on cash flow measures, as in the case of the Joint Tax Committee distributional
estimates, a more realistic picture of the contribution of IRA provisions to the total
distributional effect of the tax package is likely to emerge. In that sense, allowing
back-loaded IRAs, even as a choice, has probably made it harder to meet long-run
budgetary goals because the budget targets did not take into account the out-year
costs.
The front-loaded IRA is more likely to result in some private savings than the
back-loaded IRA, from the perspective of either conventional economic theory or the
“psychological” theories advanced by some; hence allowing back-loaded IRAs may
have detracted from national savings objectives. Of course, a front-loaded IRA also
has a larger revenue cost which offsets this private savings effect. Thus, overall
national saving is only increased by a front-loaded IRA relative to a back-loaded
IRA, under conventional analysis, if the difference in revenue costs is made up so
that public saving is not different between a back-loaded and a front-loaded IRA (and
that offsetting policy does not itself affect private savings.)
There are, however, some advantages of back-loaded IRAs. The back-loaded
IRA avoids one planning problem associated with front-loaded IRAs: if individuals
use a rule-of-thumb of accumulating a certain amount of assets, they may fail to
recognize the tax burden associated with accumulated IRA assets. In that case, the
front-loaded IRA would leave them with less after-tax assets in retirement than they
had planned, a problem that would not arise with the back-loaded IRA where no
taxes are paid at retirement. A possible second advantage of back-loaded IRAs is
that the effective tax rate is always known (zero), unlike the front-loaded IRA where
the effective tax rate depends on the tax rate today vs. the tax rate in retirement. Yet
another advantage is that the effective contribution limit in a back-loaded IRA is not
dependent on the tax rate (although it would be possible to devise an adjustment to
the IRA contribution ceiling based on tax rate).
New Proposals and Actions
Expanding IRAs vs. Accounts Directed at Lower Income
Individuals
The increase in IRAs in the final version of the omnibus tax cut bill was
estimated to cost $25.1 billion over ten years, a smaller amount due to the slower
phase in.
IRA proposals were also included in the 1999 general tax cut legislation that
was vetoed (The Taxpayer Refund and Relief Act of 1999) and in other bills focused
on more specific tax cuts. Proposals had also been made to allow penalty-free
withdrawals for a variety of purposes. Senator Roth, Chairman of the Finance
Committee, had announced a proposal to eliminate the income limits on both types
of IRAs in his outline of a proposed comprehensive tax cut on July 9, 1999. The
proposal would have also increased the contribution limit to $5,000, along with
eliminating income limits on Roth IRAs and increasing them on deductible IRAs.

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CRS-13
The proposals in the House version were more modest, and would have increased the
income limits on Roth IRAs. The final version of the Taxpayer Refund and Relief
Act would have increased the contribution limit and the income limits on Roth IRAs.
However, the income limits were not increased in the omnibus 2001 tax cut bill (H.R.
1836).
An argument can be made that such IRA contribution limits should have been
increased to preserve the real value of the limit as enacted in 1982. Using the GDP
deflator, adjusting for price changes between 1982 and 1999 would have increased
the limit to about $3,200. Assuming prices rise by 2.5% per year, the adjusted limit
would be about $4,000 by 2008 when the $5,000 limit is fully phased in; it would be
$4,175 with a price rise of 3% per year. Thus, expanding the limit to $5,000 by 2008
is a more generous contribution limit compared to 1982.

President Clinton had earlier proposed a new system referred to as Retirement
Savings Accounts (RSAs), which are similar to a front-loaded IRA in some ways.
The RSA would cover taxpayers below certain income limits ($50,000 for a married
couple, $25,000 for a single individual and $37,500 for a head of household, with
phase outs beginning at half those amounts). Lower and middle income taxpayers
would receive a 100% match of contributions, which would be phased down to 20%.
An additional 100% match for the first $100 would be included. Contributions would
be deductible. (The RSA proposals followed a more costly plan for Universal
Savings Accounts, or USAs, proposed the previous year, which involved tax credits
that actually paid for some of the individual cost of the contributions). The revenue
tax bill did include a credit aimed at lower income individuals that began at a 50%
rate, but it was not refundable and was temporary. Because so many individuals will
have no tax liability, it is difficult to direct savings subsidies at lower-income, and
even some moderate-income, individuals without refundable credits. A credit was
allowed in the 2001 legislation, but that provision is temporary and the credit is not
refundable so that many lower and moderate income individuals who have no tax
liability will not benefit.
The accounts proposed by the administration (with the retirement plans also
referred to as Retirement Savings Plans or RSAs) would convert all plans to Roth
types, remove the income limits, and increase the limits substantially; the plan would
make many provisions of the 2001 tax change permanent, but not the IRA credit. To
distinguish the two, we refer to the Clinton RSA plan.
Differences Between IRA Expansion and
Benefits Directed to Lower Income Individuals
The Clinton RSA proposal was more generous in its benefits per dollar of
contribution than IRAs; not only would the returns not be taxed, but there is a
subsidy; that is, the after tax return to a dollar contribution is greater than the pretax
return. The Clinton RSA plan was estimated to cost about $54 billion over 10 years
(considerably less than the original USA plan, which cost about $500 billion over 15
years). However, it is difficult to compare the long run costs of the two proposals,
not only because of the differences in phase-out, but also because the RSA plan is
like a front-loaded IRA so that current costs are similar to long run costs, whereas

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CRS-14
expansion of IRAs, to the extent accruing to back-loaded IRAs, will involve smaller
short-run and intermediate-run costs than long-run costs.
Secondly, the Clinton RSA proposal was targeted to lower and moderate income
individuals, while IRA expansions would tend to benefit high income individuals.
An increase in the income limit for IRAs would benefit the very small fraction of the
population that has income in excess of the current Roth IRA earnings limits (less
than 5% of tax returns).12 Increases in dollar limits on contributions will also benefit
higher individuals who are more likely to have IRAs, who are more likely to have
IRAs at maximum levels, who are likely to increase contributions the most, and who
have higher marginal tax rates that make tax forgiveness more valuable. Lower
income individuals without tax liability could have benefitted from the RSA, but not
from the IRA.

As with any new and broadly applicable program, the Clinton RSA would add
complexity to tax administration and tax returns, while IRA expansion will add little
in administrative and compliance costs, particularly since the individuals who
become newly eligible are fairly sophisticated taxpayers. The Bush administration
proposal would eventually simplify the law by providing a single form of general
savings plan.
It is difficult, however, to compare the two proposals’ effects on savings. Low
income individuals do not typically save and there may have been relatively little
effect of the Clinton RSA for that reason; however, the effect of IRAs on savings in
general is uncertain. While an expansion of IRAs is more likely to positively affect
savings than the initial IRA allowance (because it is more marginal), there is still no
clear evidence that savings will rise.
Conclusion
Unlike the initial allowance of IRAs in 1974 to extend the tax advantage
allowed to employees with pension plans, the major focus of universal IRAs has been
to encourage savings, especially for retirement. If the main objective of individual
retirement accounts is to encourage private savings, the analysis in this study does not
suggest that we will necessarily achieve that objective. Moreover, the back-loaded
approach allowed as an option is less likely to induce savings than the current form
of IRAs or the form allowed during the period of universal availability (1981-1986).
In addition, the ability to withdraw amounts for other purposes than retirement dilutes
the focus of the provision on preparing for retirement. The recent expansion in the
12 Roth IRAs begin their phase-outs at $95,000 for single and $150,000 for joint returns. In
1997, 5.1% of all taxpayers had incomes above $100,000. See Scott M. Hollenbeck and
Maureen Keeman Kahr, “Individual Income Tax Returns, 1997: Early Tax Estimates,”
Internal Revenue Service Statistics of Income Bulletin, Winter 1998-99, p. 138. Because of
the income limits, which on average are well above $100,000 and the availability to those
not covered by private pensions, lifting the income limit will benefit less than 5% of
taxpayers.

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CRS-15
IRA limit may make the provisions more likely to provide a marginal incentive, but
will also direct the benefits towards higher income individuals.
Both the IRA benefits adopted in 1997 and those adopted in 2001 may also put
some pressure on national savings in the future, as the provisions involve a growing
budgetary cost and these reductions in government savings will offset any private
savings effects. The same effect would occur with proposed extensions.
IRAs have often been differentiated from other tax benefits for capital income
as the plan focused on moderate income or middle class individuals. The IRA has
been successful in that more of the benefits are targeted to moderate income
individuals than is the case for many other tax benefits for capital (e.g., capital gains
tax reductions). Nevertheless, data on participation and usage, and the current
allowance of IRAs for lower income individuals, suggest that the benefit will still
accrue primarily to higher income individuals.
Certain features of the 1997 changes complicate administrative costs, and there
has been relatively little attention paid to the dramatic differences in the penalties for
early withdrawal associated with back-loaded vs front-loaded accounts.
The RSA proposals made by the Clinton Administration, which are similar to
IRAs in some ways, have more generous subsidy rates; however, they benefit lower
and moderate income individuals rather than high income individuals. While a credit
targeted at lower and moderate income individuals was included in the 2001 tax
legislation, the credit will sunset and is not refundable, limiting its scope. The
current Bush administration proposals will tend to benefit higher income individuals.

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CRS-16
Appendix: A History of IRAs
Individual retirement accounts of the traditional type (front-loaded) were first
allowed in 1974 (up to $1500 or 15% of earnings), in order to extend some of the tax
benefits of employer pension plans to those whose employers did not have such
plans. IRAs were made universally available in 1981 (and the limits increased to
$2000) as a general savings incentive.

In 1986, IRAs were restricted for higher income individuals already covered by
employer pension plans, as part of the general base broadening needed to reach the
distributional and revenue neutrality goals of the Tax Reform Act of 1986. Those
covered by employer plans with incomes less than $50,000 for married individuals
and $35,000 for single individuals were not eligible. There was a $10,000 phase-out
range (i.e. $40,000 to $50,000) where partial benefits are allowed. Deductible
contributions were limited to $2,000 or total earnings, whichever is less;
contributions could also be made for a non-working spouse (but total contributions
for a married couple could not exceed total earnings). Individuals above the income
limits could make non-deductible contributions and take advantage of tax deferral.
In the 101st Congress (1989-1990) several proposals to restore IRA benefits
were made: the Super IRA, the IRA-Plus, and the Family Savings Account (FSA).
The Super-IRA proposal suggested by Senator Bentsen and approved by the
Senate Finance Committee in 1989 (S. 1750) would have allowed one half of IRA
contributions to be deducted and would have eliminated penalties for “special
purpose” withdrawals (for first time home purchase, education, and catastrophic
medical expenses). The IRA proposal was advanced as an alternative to the capital
gains tax benefits proposed on the House side.
The IRA-Plus proposal (S. 1771) sponsored by Senators Packwood, Roth and
others proposed an IRA with the tax benefits granted in a different fashion from the
traditional IRA. Rather than allowing a deduction for contributions and taxing all
withdrawals similar to the treatment of a pension, this approach simply eliminated
the tax on earnings, like a tax-exempt bond. This IRA is commonly referred to as a
back-loaded IRA. The IRA-Plus would also be limited to a $2,000 contribution per
year. Amounts in current IRAs could be rolled over and were not subject to tax on
earnings (only on original contributions); there were also special purpose
withdrawals with a 5-year holding period.
The Administration proposal for Family Savings Accounts (FSAs) in 1990 also
used a back-loaded approach with contributions allowed up to $2500. No tax would
be imposed on withdrawals if held for 7 years, and no penalty (only a tax on
earnings) if held for 3 years. There was also no penalty if funds were withdrawn to
purchase a home. Those with incomes below $60,000, $100,000, and $120,000
(single, head of household, joint) would be eligible.
In 1991, S. 612 (Senators Bentsen, Roth and others) would have restored
deductible IRAs, and also allowed an option for a nondeductible or back-loaded

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CRS-17
“special IRA.” No tax would be applied if funds were held for 5 years and no
penalties would apply if used for “special purpose withdrawals.”
In 1992 the President proposed a new IRA termed a FIRA (Flexible Individual
Retirement Account) which allowed individuals to establish back-loaded individual
retirement accounts in amounts up to $2,500 ($5,000 for joint returns) with the same
income limits as proposed in the 101st Congress. No penalty would be applied for
funds held for 7 years.
Also in 1992, the House passed a limited provision (in H.R. 4210 ) to allow
penalty-free withdrawals from existing IRAs for “special purposes.” The Senate
Finance Committee proposed, for the same bill, an option to choose between back-
loaded IRAs and front-loaded ones, with a 5-year period for the back-loaded plans
to be tax free and allowing “special purpose” withdrawals. This provision was
included in conference, but the bill was vetoed by the President for unrelated reasons.
A similar proposal was included in H.R. 11 (the urban aid bill) but only allowed
IRAs to be expanded to those earning $120,000 for married couples and $80,000 for
individuals (this was a Senate floor amendment that modified a Finance Committee
provision). That bill was also vetoed by the President for other reasons.
The Contract with America and the 1995 budget reconciliation proposal
included proposed IRA expansions similar to the 1997 proposals (discussed below),
but this package was not adopted. The Health Insurance Portability and
Accountability Act of 1996 allowed penalty-free withdrawals from IRAs for medical
costs.
In 1997, the President proposed to increase the adjusted gross income limits for
the current IRAs to $100,000 for married couples (with a phase-out beginning at
$80,000), and to $70,000 for individuals (with a phase out beginning at $50,000).
Part of this expansion would have occurred in 1997-1999 (a joint phase out between
$70,000 and $90,000 and a single phase-out between $45,000 and $65,000). Such
a proposal would extend individual retirement account eligibility to the vast majority
of taxpayers. Taxpayers would have had the option of choosing instead special,
nondeductible, IRAs, with no taxes applying if the funds are held in the account for
at least 5 years. The 10% penalty would not have been due for withdrawals during
that period for post-secondary education, first-home purchase, or unemployment
spells of 12 weeks or more. Existing deductible IRAs could be rolled over into
nondeductible accounts with the payment of tax on withdrawals.
The House-proposed revisions were generally the same as those proposed in the
House Republican Contract With America and included in the 1995 budget
reconciliation proposal; and as those reported out of the Ways and Means
Committee. This change would have allowed individuals to contribute up to $2,000
to a non-deductible or “back-loaded” IRA regardless of income, termed the
American Dream Savings (ADS) account. The back-loaded IRA does not provide
a tax deduction up front, but does not impose taxes on qualified withdrawals. The
$2,000 would have been indexed for inflation after 1998. This provision would have
been in addition to deductible IRAs (but would have replaced the current
nondeductible accounts); earnings on withdrawals would not have been be taxed if
held for at least 5 years and used for qualified purposes: withdrawals after age 59

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CRS-18
and ½, left in the estate, attributable to being disabled, or withdrawn for down
payment on a first home.
A 10% early withdrawal penalty would have continued to apply to non-qualified
withdrawals, but withdrawals to pay for higher education expenses would not have
been subject to the penalty tax. No minimum distribution requirements would have
applied. Taxes and penalties would not have applied until the original contribution
is recovered, and all IRAs would be aggregated for this purpose.
Amounts in current IRAs could have been withdrawn and placed into the
nondeductible IRAs without penalty in prior to 1999. Amounts rolled over must
have been included in income in equal increments over 4 years.
The Senate 1997 version would have raised the income limits on deductible
IRAs from $50,000 to $60,000 for single returns and $80,000 to $100,000 for joint
returns by 2004. These limits would be phased in: $30,000 to $40,000 for single and
$50,000 to $60,000 for joint in 1998-9; $35,000 to $45,000 for single and $60,000
to $70,000 for joint 2000-1; $40,000 to $50,000 for single and $70,000 to $80,000
for joint in 2002-3. Individuals whose spouses are participants in an employer plan
would have been eligible regardless of the income limit.
This proposal would also have introduced back-loaded accounts as a substitute
for nondeductible accounts; individuals would have to reduce the contributions to
these accounts by the amounts deductible from front-loaded accounts. These
accounts were called IRA Plus accounts. The rules regarding withdrawals and
penalties were similar to those in House bill, except that withdrawals without penalty
were also allowed for long-term unemployment. There were no income limits for
back-loaded IRAs.
The final bill followed the Senate version, with some alterations to the phase
outs. The provision allowing exemption from withdrawal penalties for long-term
unemployment is dropped.
The Senate version of Taxpayer Refund and Relief Act of 1999, would have
increased contribution limits to $5,000, increased income limits for deductible IRAs
and eliminated income limits for Roth IRAs. The House bill’s provisions were much
more limited: Roth IRA limits would have been increased. The final bill more
closely followed the Senate version, although the income limits for Roth IRAs were
to be increased with no change for deductible IRAs. The President vetoed the tax
cut because of its large revenue cost. Several bills including IRA provisions saw
some legislative action in 2000, but none were enacted.
The omnibus 2001 tax cut bill, H.R. 1836, would gradually increase
contribution limits. IRA limits will be increased to $3,000 in 2002-2004, to $4,000
in 2005-2007 and $5,000 in 2008. Limits will then be indexed for inflation. Limits
for individuals over 50 will increase a further $500 in 2002 and $1,000 in 2006. A
tax credit beginning at 50%, but phasing down, would be allowed for lower income
individuals.

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