Order Code RL30255
CRS Report for Congress
Received through the CRS Web
Individual Retirement Accounts (IRAs):
Issues and Proposed Expansion
Updated July 31, 2006
Thomas L. Hungerford
Specialist in Public Sector Economics
Government and Finance Division
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Individual Retirement Accounts (IRAs):
Issues and Proposed Expansions
Summary
Current law provides many incentives to promote saving. The goal of these
provisions is to increase saving for special purposes such as education or retirement,
and to increase national saving. Increased national saving can lead to faster wealth
and capital accumulation, which can boost future national income.
An increasingly important retirement saving vehicle is the individual retirement
account (IRA). IRA savings is encouraged by two mechanisms — a carrot and a
stick approach. First, tax provisions allow individuals to defer taxes on IRA
contributions and investment earnings or to accumulate investment earnings tax free.
Second, withdrawals before the age of 59½ are generally subject to a 10% penalty tax
in addition to regular taxes.
There are two types of IRAs: the traditional IRA and the Roth IRA. The
traditional IRA allows for the tax deferred accumulation of investment earnings, and
some individuals are eligible to make tax-deductible contributions to their traditional
IRAs while other individuals are not. Some or all distributions from traditional IRAs
are taxed at retirement. In contrast, contributions to Roth IRAs are not tax
deductible, but distributions from Roth IRAs are not taxed on withdrawal in
retirement. Expanded contribution limits were adopted in 2001, but are scheduled
to expire after 2010; H.R. 4, the Pension Protection Act, passed by the House July
29, would make those increases permanent.
In the FY2006 budget proposal, the President proposed consolidating the
traditional and Roth IRAs into a single Retirement Savings Account (RSA).
Subsequently, in November 2006, the President’s Advisory Panel on Federal Tax
Reform proposed changes to IRAs. The panel’s plan would create Save for
Retirement Accounts (SRAs) to replace traditional and Roth IRAs. Both the RSA
and SRA would be modeled on the Roth IRA. Implementation of these proposals
could increase retirement saving and could reduce administrative costs.
Neither conventional economic theory nor the empirical evidence on savings
effects tends to support the argument that increased IRA contributions are primarily
new savings. Roth-style accounts are less likely to induce new private savings than
are traditional ones. Since both the RSA and SRA are modeled on Roth IRAs,
neither appears likely to appreciably increase national saving. Furthermore, with no
income limits on owning RSAs and SRAs, as well as the higher contribution limit
for SRAs, it is likely that tax expenditures would increase, especially beyond the
typical budget five- or 10-year horizon, thus exacerbating future budget pressures.
Additionally, these proposals would predominantly benefit higher-income individuals
and families who are the ones most likely to save without the added incentive.
This report will be updated as legislative developments warrant.

Contents
Current Rules Regarding Individual Retirement Accounts . . . . . . . . . . . . . . . . . . 2
Traditional (Front-loaded) IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Roth (Back-loaded) IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Tax Consequences of IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
When Traditional and Roth IRAs are Equivalent . . . . . . . . . . . . . . . . . . . . . 5
Differences Between Traditional and Roth IRAs . . . . . . . . . . . . . . . . . . . . . 5
Variations in Tax Rates over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Contribution Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Nonqualified Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Economic Importance of IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Savings Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Distributional Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Administrative Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Policy Implications of Traditional and Roth IRAs . . . . . . . . . . . . . . . . . . . . . . . 16
Recent Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Appendix: A History of IRA Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
List of Figures
Figure 1. Total IRA Assets, 1992-2004 (billions of dollars) . . . . . . . . . . . . . . . . . 9
Figure 2. Total IRA Deductions, 1993-2003 (billions of dollars) . . . . . . . . . . . . 10
Figure 3. Total Taxable IRA Distributions, 1993-2000 (billions of dollars) . . . . 11
List of Tables
Table 1. Income Limits for Tax Deductions of Contributions to
Traditional IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table 2. Income Limits for Contributing to Roth IRA . . . . . . . . . . . . . . . . . . . . . 4
Table 3. Net Distribution from Taxable Savings Account and Various
Types of IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Individual Retirement Accounts (IRAs):
Issues and Proposed Expansions
Retirement experts generally argue that there are three pillars to retirement
income security: Social Security, employer-provided pensions, and private savings.
Coverage by Social Security is nearly universal, but its benefits are limited, and many
workers reach retirement with small pensions and little savings. Over the past few
decades, Congress and the President have offered tax incentives to encourage
businesses to offer pensions and workers to save. The Joint Committee on Taxation
estimates that tax incentives to encourage retirement saving could cost the U.S.
Treasury more than $700 billion between 2005 and 2009.1
An increasingly important retirement saving vehicle is the individual retirement
account (IRA). IRAs were created by ERISA, the Employee Retirement Income
Security Act of 1974 (P.L. 93-406), which was signed into law by President Ford on
Labor Day. ERISA was passed to protect the interests of pension plan participants
and pension beneficiaries.2 IRAs were originally designed to give individuals not
covered by an employer pension plan a chance to save in a tax advantaged retirement
account. Since ERISA was passed in 1974, the law has been amended several times
to change the tax treatment of IRAs and create new types of IRAs. Currently, nearly
everyone is eligible to contribute to at least one type of IRA.
IRA savings is encouraged by two mechanisms — a carrot and a stick approach.
First, tax provisions allow individuals to defer taxes on IRA contributions and
investment earnings or to accumulate investment earnings tax free, effectively raising
the rate of return on IRA contributions. Second, nonqualified withdrawals before the
age of 59½ are subject to a 10% penalty tax in addition to regular taxes.
President Bush has recently proposed a major change to IRAs. Under the
President’s proposal, all IRAs would be combined into a single Roth-style IRA called
Retirement Savings Accounts (RSAs) with an annual contribution limit of $5,000.
While such a proposal might increase retirement saving, there are questions whether
it would increase national saving.
This report provides background information on IRAs, including a description
of current law and the tax benefits of IRAs. In addition, the effects of IRAs on
saving and other national objectives is discussed. A final section describes and
1 The cost of tax incentives are measured in terms of tax expenditures, which are estimates
of the revenue losses attributable to provisions of Federal tax laws.
2 See CRS Report 97-1014 EPW, ERISA Primer: Its Origin and Development, by Ray
Schmitt.

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analyzes recent IRA reform proposals. The appendix contains a history of the
development of IRAs.
Current Rules Regarding
Individual Retirement Accounts
Although IRAs have been around for over 30 years, the rules regarding IRAs
have changed several times (see the appendix for a brief history of IRAs). The
current rules were set in the Economic Growth and Tax Relief Reconciliation Act of
2001 (P.L. 107-16). For 2005, both the traditional and Roth IRAs have an annual
contribution limit of $4,000. The contribution limit will rise to $5,000 in 2008 and
will be adjusted to inflation (in $500 blocks) after 2008. Individuals 50 years or
older may make additional annual “catch-up” contributions of $500. The catch-up
contribution will increase to $1,000 in 2006. The provisions of the Economic
Growth and Tax Relief Reconciliation Act (EGTRRA) will expire after 2010 unless
extended by Congress. H.R. 4, the Pension Protection Act passed by the House on
July 29, would make the pension and IRA provisions of EGTRRA permanent.
Traditional (Front-loaded) IRAs
Contributions to traditional IRAs by certain individuals are tax deductible. The
amount of the deduction depends on the level of the individual’s modified adjusted
gross income (AGI) and whether the individual or the individual’s spouse is covered
by an employer pension plan.3 Table 1 shows the income limits for the deductibility
of contributions. Generally, individuals not covered by an employer pension plan
and lower-income individuals are entitled to at least a partial deduction. Single
individuals with modified AGI of less than $45,000 are entitled to a full deduction
even if they are covered by an employer pension plan. Married individuals filing
jointly and not covered by an employer pension plan but whose spouses are covered
by a pension plan are entitled to deduct part of their traditional IRA contribution if
their modified AGI is between $150,000 and $160,000. H.R. 4297, which became
law in May of 2006, allowed a temporary window in 2010 to allow high-income
individuals to convert any of their IRAs to Roth IRAs, so that their partially tax-
favored plans become fully tax exempt. Taxes on the conversions are due in 2011
and 2012.
3 Modified adjusted gross income does not include certain deductions and income exclusions
that are included in adjusted gross income from the 1040 or 1040A tax form.

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Table 1. Income Limits for Tax Deductions of
Contributions to Traditional IRAs
Income Tax Filing Status
Modified AGI
Deduction
Individual Covered by Employer Pension Plan
$45,000 or less
Full
Single; or head of
$45,000 to $55,000
Partial
household
$55,000 or more
None
$65,000 or less
Full
Married, filing jointly; or
$65,000 to $75,000
Partial
qualifying widow(er)
$75,000 or more
None
less than $10,000
Partial
Married, filing separately
$10,000 or more
None
Individual Not Covered by Employer Pension Plan
Single; head of household;
Any Amount
Full
or qualifying widow(er)
Married, filing jointly; or
married, filing separately
Any Amount
Full
with spouse not covered
by employer pension plan
$150,000 or less
Full
Married, filing jointly with
a spouse who is covered
$150,000 to $160,000
Partial
by employer pension plan
$160,000 or more
None
Married, filing separately
less than $10,000
Partial
with a spouse who is
covered by employer
pension plan
$10,000 or more
None
Whether or not contributions are deductible, investment earnings on traditional
IRA assets are tax deferred until distribution at retirement. Taxable distributions
from traditional IRAs are taxed as ordinary income. All deductible contributions to
traditional IRAs are fully taxable when withdrawn. However, nondeductible or after-
tax contributions are not taxed when withdrawn; only the investment earnings on
these contributions are taxable. Taxable distributions from traditional IRAs made
before the individual has reached 59½ years of age are subject to an additional 10%
penalty tax.

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Roth (Back-loaded) IRAs
Contributions to Roth IRAs are not tax deductible, but qualified distributions
from Roth IRAs are tax free. Not everyone, however, is eligible to contribute to a
Roth IRA — there are income limits on participation (see Table 2). At a certain
income level (for example, $95,000 for a single individual), the contribution limit is
reduced. The contribution limit is eventually reduced to zero, and the individual is
not eligible to contribute to a Roth IRA. Although qualified distributions from Roth
IRAs are tax free, early distributions may be subject to a 10% penalty tax in addition
to regular taxes.4
Table 2. Income Limits for Contributing to Roth IRA
Income Tax Filing Status
Modified AGI
Contribution
less than $150,000
full contribution
Married, filing jointly; or
$150,000 to $160,000
reduced contribution
qualified widow(er)
$160,000 or more
no contribution
$0
full contribution
Married, filing separately
and lived with spouse at
$0 to $10,000
reduced contribution
any time during the year
$10,000 or more
no contribution
Single; head of household;
less than $95,000
full contribution
or married, filing
separately and did not live
$95,000 to $110,000
reduced contribution
with spouse during the
year
$110,000 or more
no contribution
Tax Consequences of IRAs
The main tax advantages of a traditional IRA are the deductibility of
contributions for some individuals and the tax deferment of investment returns on
IRA assets. The advantages are due to (1) tax-deferred compounding of interest, and
(2) the possibility of postponing tax liability from a time when income is high and
the individual is in a high tax bracket, to a time when income may be lower and the
individual is in a lower tax bracket. However, there is no guarantee that income will
be lower after retirement than before, or that the tax brackets will be the same after
retirement as before.
Contributions to a Roth IRA are taxable, but the returns earned on Roth IRA
assets are not taxable. Consequently, in this important respect, Roth IRAs are like
4 A qualified distribution is a payment from a Roth IRA made at least five years after the
contribution was placed in the IRA account and the individual is at least 59½ years old.

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a tax-exempt bond. Very-high-income individuals and families, however, are not
eligible to establish and contribute to a Roth IRA.
Losses on both traditional and Roth IRA investments can be included on an
individual’s tax return.5 The loss, however, can only be included if the individual
itemizes, and after all the amounts in the IRA have been distributed with the total
distributions being less than total nondeductible contributions.
When Traditional and Roth IRAs are Equivalent
The ultimate tax treatment of a front-loaded deductible traditional IRA and a
back-loaded Roth IRA can be equivalent under certain circumstances. Assuming
that tax rates are the same at the time of contribution and withdrawal, a deductible
traditional (front-loaded) IRA offers the equivalent of no tax on the return to savings,
just like a Roth (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. Suppose an individual had earned $100 before taxes to invest in an IRA
and faces a tax rate of 25%. With a deductible traditional IRA, the individual could
invest the $100, earn a 10% return, and have $110 after one year. At a 25% tax rate,
the individual would receive an $82.50 after-tax distribution from his or her IRA.6
If the individual instead chose a Roth IRA, he or she would first pay taxes on the
$100 (equal to $25) and contribute $75 to the Roth IRA. After one year and a 10%
return on investment, the individual would receive an $82.50 distribution from his
or her Roth IRA ($75 in principal and a $7.50 return on investment, neither of which
would be taxed). In this example, the after-tax distributions from each type of IRA
are the same.7
Differences Between Traditional and Roth IRAs
There are 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 holds only 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. Taking
5 The loss is claimed as a miscellaneous itemized deduction, subject to the 2% of adjusted
gross income limit, on schedule A of the 1040 tax form.
6 By deducting the $100 the individual does not have to pay $25 in taxes in the year the
contribution is made to the IRA. However, this $25 will be paid as taxes a year later when
the individual withdraws the funds from the IRA. This is essentially equivalent to
borrowing $25 from the government at a 0% annual interest rate and investing the loan in
the financial markets.
7 The tax treatment is different from those who are not eligible for either a deductible
traditional IRA or Roth IRA. This individual would contribute the after-tax $75 to an IRA,
earn a return of $7.50 which will be taxed at the 25% tax rate. The after-tax IRA
distribution will be $80.62.

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the same example as before, assume that the individual’s tax rate at the time of
contribution is 25%, but is 15% at the time of withdrawal. The individual with the
Roth IRA would still receive a distribution in the amount of $82.50 after one year.
The individual contributing to the deductible traditional IRA would still have $110
in pre-tax principal and interest after one year, but would be taxed at the 15% rate
with an after-tax IRA distribution of $93.50.8 In this case, the deductible traditional
(front-loaded) IRA has better tax advantages than the Roth IRA. The reverse could
be true if the individual faces a higher tax rate at the time of withdrawal than at the
time of contribution.
Contribution Limits. The contribution limits for traditional and Roth IRAs
are the same. For individuals contributing at the limit, however, the back-loaded
Roth IRA is more generous than both deductible and nondeductible traditional IRAs.
Suppose the contribution limit is $4,000 (the limit for 2005), the interest rate is 8%,
and the tax rate is 25%. If the individual has $4,000 (after tax) for a one-time
investment in an IRA, the after-tax dollar yield after 20 years is shown in Table 3 for
each type of IRA and for a conventional taxable investment account.
Table 3. Net Distribution from Taxable Savings Account and
Various Types of IRAs
Net Distribution
Net Distribution of Nonqualified
of Qualified
Withdrawal
Withdrawal After
20 Years
After 1 Year
After 20 Years
Roth IRA
$18,644
$4,208
$13,518
Deductible
$17,190
$3,868
$15,326
Traditional IRA
Nondeductible
$14,983
$4,208
$13,518
Traditional IRA
Taxable
Investment
$12,829
$4,240
$12,829
Account
After 20 years, the distribution to the individual from a Roth IRA would be
$18,644. No taxes would be due on this amount. An individual investing in a
nondeductible traditional IRA would receive a $14,983 distribution after 20 years.
This individual would have to pay taxes on $14,644 in accumulated investment
earnings. An individual investing $4,000 in a front-loaded deductible traditional IRA
would be able to deduct the $4,000 and would consequently have an extra $1,000 to
8 This is essentially equivalent to the individual borrowing $25 from the government (the
taxes not paid because of deductibility), investing the money, and paying the government
back $15. The individual is borrowing at a -40% interest rate.

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save (assuming a 25% tax rate).9 After 20 years, the IRA balance would be $18,644,
which is taxed at the 25% tax rate. The balance in the taxable investment account
would be $3,207. The total after-tax income would be $17,190.10 In comparison,
with a $4,000 investment, the balance in a taxable investment account after 20 years
would be $12,829.
Nonqualified Withdrawals. Traditional and Roth IRAs differ in the tax
burdens imposed if nonqualified withdrawals are made (generally before retirement
age).11 This issue is important because it affects both the willingness of individuals
to commit funds to an account that might be needed before retirement and the
willingness to withdraw funds already committed to an account.
The front-loaded deductible traditional IRA provides steep tax burdens for early-
year withdrawals which decline dramatically over time because the penalty applies
to both principal and interest. (Without the penalty, the effective tax rate is always
zero.) For example, with a 25% tax rate and an 8% rate of return, an individual
taking a nonqualified distribution from a deductible IRA would face an effective
interest rate of -6.4% rather than the 8% nominal return because of the 10% penalty
tax. In other words, an individual would have effectively lost 6.4% of the original
investment. The effective tax burden in this case would be 180%.12 After three years
the effective tax burden would be 63%, and 38% after five years. After about seven
years, the tax burden would be the same as an investment made in a taxable account:
25%. Thereafter, tax benefits would occur, with the effective tax burden falling to
20% after 10 years, 10% after 20 years and 6% after 30 years. These tax benefits
would occur because taxes would be deferred, and the value of the deferral would
exceed the penalty.
The case of the back-loaded Roth IRA is much more complicated. First
consider the case where all such IRAs are withdrawn. In this case, the effective tax
burdens would be smaller in the early years. Although premature withdrawals are
subject to both regular tax and penalty, the taxes apply only to the earnings, which
are initially very small. In the first year, the effective tax rate would be the sum of the
ordinary tax rate (25%) and the penalty (10%), or 35%. Because of deferral, the
9 The individual could spend this $1,000. But it is assumed in this example that he saves
this amount in a taxable investment account that earns the nominal yield of 8%. This $1,000
“loan” is eventually paid back to the government because the original deductible $4,000 (the
investment principal) is taxed at the 25% tax rate when it is withdrawn.
10 The ranking of a Roth IRA and deductible traditional IRA depends on the tax rate the
individual faces when the money is withdrawn from the account. However, qualified
distributions from both Roth IRAs and deductible traditional IRAs will always be greater
than from a nondeductible traditional IRA if the rate of return is positive.
11 A qualified withdrawal from an IRA is either a withdrawal taken after age 59½ or a
penalty-free withdrawal prior to retirement for special purposes. These special purposes
include using the distribution for unreimbursed medical expenses, buying or building a first
home, and higher-education expenses.
12 The effective tax burden is the ratio of what the individual lost (compared to what they
would have gained without the penalty tax) to what they would have gained in the absence
of the 10% penalty tax.

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effective tax rate would slowly decline (33% after three years, 32% after five years,
28% after 10 years). In this case, it would take 14 years to earn the same return that
would have been earned in a taxable account at a 25% tax rate.13 Partial premature
withdrawals from Roth IRAs, on the other hand, would be treated more generously,
as they would be considered to be a return of principal until all original contributions
were recovered.
The dollar consequences of the 10% penalty tax on nonqualified distributions
are shown in the final two columns of Table 3. After one year, a taxable investment
account would yield a higher dollar amount than a nonqualified distribution from any
type of IRA. The deductible traditional IRA would incur a loss after one year — not
only would the net distribution be less than that for other types of IRAs, it would be
less than the original $4,000 investment. Since the investment earnings from a Roth
IRA would be subject to both regular and penalty taxes, the distribution would be the
same as for a nondeductible traditional IRA.
After 20 years, the value of the tax deferral of the deductible traditional IRA
would exceed the tax penalty, so the net distribution would be greater than that from
a taxable investment account ($15,326 versus $12,829). The nonqualified
distribution from a Roth IRA and nondeductible traditional IRA would be $13,518
after 20 years — greater than the return from a taxable investment account but less
than a nonqualified distribution from a deductible traditional IRA.
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
Roth account than in a front-loaded deductible traditional 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 Roth IRAs in the early years
even with penalties. This feature of the back-loaded Roth IRA makes these
tax-favored accounts much closer substitutes for short-term savings not intended for
retirement.
It could eventually become more costly to make premature withdrawals from
back-loaded accounts than from front-loaded accounts. Consider, for example, a
withdrawal in the year before eligibility at age 59½ of all funds that had been in the
account for a long time. For a front-loaded IRA, the cost would be the 10% penalty
on the withdrawal plus the payment of regular tax one year in advance — both would
apply to the full amount. For a back-loaded account, where no tax or penalty would
be due if held until retirement, the cost would be the penalty plus the regular tax on
the fraction of the withdrawal that represented earnings, which would be a large
fraction of the account if held for many years.
13 These patterns are affected by the tax rate.

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Economic Importance of IRAs
Individual retirement accounts held $873 billion in assets in 1992, which was
equivalent to almost 14% of gross domestic product (GDP). By the end of 2004,
IRAs held $3.5 trillion in assets, or the equivalent of almost 30% of GDP (see Figure
1
). IRAs held almost $1 of every $3 in retirement assets in 2004.14 IRA assets grew
between 1992 and 1999, fueled by the rising stock market and the introduction of
Roth IRAs in 1997. After the stock market bubble burst, total IRA assets remained
fairly constant at about $2.6 trillion. After the stock market recovered somewhat in
2002, IRA assets began to increase.
Figure 1. Total IRA Assets, 1992-2004
(billions of dollars)
$4,000
$3,500
$3,000
$2,500
$2,000
Dollars
$1,500
$1,000
$500
$0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Source: Federal Reserve Board, Flow of Funds Accounts of the United States, table L.225.i.
IRAs have effects on the federal budget. On the one hand, certain IRA
contributions are tax deductible, which will reduce income tax revenues. Between
1993 and 2003, annual IRA income tax deductions varied between $7.4 billion and
$10.0 billion (see Figure 2). After Roth IRAs were introduced in 1997 (which are
not deductible), IRA deductions fell from $8.7 billion in 1997 to $7.4 billion by
2001. After 2001, IRA deductions increased, reaching $10 billion in 2003 (the last
year for which tax data are publicly available).
14 At the end of 2004, public and private pensions and IRAs held $11.5 trillion in assets.

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Figure 2. Total IRA Deductions, 1993-2003
(billions of dollars)
$12
$10
$8
$6
Dollars
$4
$2
$0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Source: Internal Revenue Service, Statistics of Income Division, Individual Income Tax Returns,
Publication 1304, various years.
On the other hand, certain IRA distributions are taxable, which will increase
income tax revenues. Taxable IRA distributions amounted to $27.1 billion in 1993
and grew to almost $100 billion by 2000 (see Figure 3). After 2000, taxable IRA
distributions fell slightly and amounted to $88.3 billion in 2003.

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Figure 3. Total Taxable IRA Distributions, 1993-2003
(billions of dollars)
$120
$100
$80
$60
Dollars
$40
$20
$0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Source: Internal Revenue Service, Statistics of Income Division, Individual Income Tax Returns,
Publication 1304, various years.
The cost to the government of the tax-favored treatment of IRAs can be
measured by the concept of tax expenditures. Tax expenditures are defined as
“revenue losses attributable to provisions of the Federal tax laws which allow a
special exclusion, exemption, or deduction from gross income or a deferral of tax
liability.”15 The Joint Committee on Taxation estimates that the tax expenditures of
individual retirement plans will be $11.2 billion in FY2005 and will amount to $80.2
billion between 2005 and 2009.16
Savings Effects
Higher savings rates can lead to faster wealth and capital accumulation, which
can boost future national income.17 An important question is whether or not the IRA
tax incentives increase saving. The broadest measure of saving is national saving
which consists of saving by households (personal saving), businesses, and the
government through the budget surplus (public saving). IRA tax incentives (and
15 Congressional Budget and Impoundment Control Act of 1974 (P.L. 93-344).
16 Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years
2005-2009,” Jan. 12, 2005, table 1, p. 38.
17 Other factors also affect future income and living standards. Productivity growth, for
example, directly raises future national income even without an increase in national saving.

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many other retirement income tax incentives) can affect both personal and public
saving. The tax expenditures for IRAs (discussed in the previous section) will lower
public saving by reducing the budget surplus or increasing the budget deficit.
Conventional economic theory and empirical analysis do not offer unambiguous
evidence that these tax incentives have increased personal or national saving.18 From
a theoretical perspective, 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 consumption 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 their target amount of savings (an
income effect). The overall consequence for savings depends on the relative
magnitude of these two effects. Empirical evidence on the relationship of the rate of
return to the saving rate is mixed but indicates mostly small effects of uncertain
direction. Recent evidence of the uncertainty of increasing savings with a higher rate
of return is the juxtaposition of high returns in the stock market in the mid- to late
1990s 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 tax incentives
for IRAs will not be successful in increasing savings rates. The increasing individual
contributions to IRAs may simply have resulted from shifting existing assets into
IRAs or diverting savings, which would otherwise have occurred, into IRAs.
IRAs are unlikely to increase savings because most tax benefits were provided
to individuals who contributed the maximum amount, which eliminates any
substitution effect. For these individuals, the effect on savings is unambiguously
negative, with one exception. In the case of the front-loaded deductible traditional
IRA, savings could increase to offset part of the up-front tax deduction, but only if
18 For a more complete discussion of the savings literature, see Jane G. Gravelle, The
Economic Effects of Taxing Capital Income
(Cambridge, MA: 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 paper by Orazio P. Attanasio
and Thomas C. DeLeire, “The Effect of Individual Retirement Accounts on Household
Consumption and National Savings,” Economic Journal, vol. 112 ( July 2002), pp. 504-538,
found little evidence that IRAs increased savings. For additional surveys see the three
articles published in the Journal of Economic Perspectives, vol. 10, no. 3 (Fall 1996): R.
Glenn Hubbard and Jonathan Skinner, “Assessing the Effectiveness of Savings Incentives,”
(pp. 73-90); James M. Poterba, Steven F. Venti, and David A. Wise, “How Retirement
Savings Programs Increase Saving,” (pp. 91-113); Eric M. Engen, William G. Gale, and
John Karl Scholz, “The Illusory Effects of Savings Incentives on Saving,” (pp. 113-138).
A 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,” International
Monetary Fund working paper 96/87, Aug.1996, found that IRAs did not increase private
household saving. A more recent study by Eric M. Engen and William G. Gale found that
401(k) plans, which are similar to IRAs in some ways, had a negligible to modest effect on
savings. See “The Effects of 401(k) Plans on Household Wealth: Differences Across
Earnings Groups,” National Bureau for Economic Research working paper 8032, Dec. 2000.
See also Orazio P. Attanasio, James Banks, and Matthew Wakefield, “Effectiveness of Tax
Incentives to Boost (Retirement) Savings: Theoretical Motivation and Empirical Evidence,”
OECD Economic Studies No. 39, 2004/2, pp. 145-172, which presents evidence that
retirement saving tax incentives induce very little new saving.

CRS-13
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 Roth IRA or a nondeductible traditional 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. Theoretical arguments have been made that
IRAs increase savings because of psychological, “mental accounting,” 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
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.19
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 an empirical
study by Gale and Scholz using similar data found no evidence of a savings effect.20
A study by Joines and Manegold 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 using this approach also found little
evidence of an overall savings effect.21 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 the expansion of IRAs in 1997.
19 This material has been presented by Steven Venti and David Wise in several papers; see
for example, “Have IRAs Increased U.S. Savings?” Quarterly Journal of Economics, vol.
105, no. 3 (Aug. 1990), pp. 661-698.
20 See William G. Gale and John Karl Scholz, “IRAs and Household Savings,” American
Economic Review
, vol. 84 (Dec. 1994), pp. 1233-1260. A 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.
21 See Douglas H. Joines and James G. Manegold, “IRAs and Savings: Evidence from a
Panel of Taxpayers,” Federal Reserve Bank of Kansas City Research working paper 91-05,
Oct. 1991; Orazio P. Attanasio and Thomas C. DeLeire, “The Effect of Individual
Retirement Accounts on Household Consumption and National Savings,” Economic
Journal
, vol. 112 (July 2002), pp. 504-538.

CRS-14
It is important to recognize that this debate on the effects of IRAs on savings
concerned the effects of front-loaded deductible IRAs. Many of the arguments that
suggest IRAs would increase savings do not apply to back-loaded Roth IRAs. 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 Roth 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 Roth 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 traditional IRAs, or who are now choosing
back-loaded Roth IRAs 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 the penalty applying to early withdrawals is much smaller. In addition,
funds are not as illiquid or tied up because of the possibility of withdrawing them
penalty-free for special purposes, including 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 1997 legislation,
will increase savings.
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 and income 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 also 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.

CRS-15
Ownership of IRAs has increased substantially since 1986, however. In 2004,
the Investment Company Institute estimates that 40% of U.S. households owned an
IRA.22 Not surprisingly, households that own IRAs have higher income and more
wealth than households not owning IRAs. Although there are income limits on the
deductibility of IRA contributions, a disproportionate share of the tax benefits accrue
to upper-income taxpayers. In 2003, tax returns reporting $75,000 or more in
adjusted gross income accounted for 23.5% of all taxable returns. While only 4.5%
of these higher-income returns reported a tax-deductible IRA contribution, they
accounted for 40% of all reported deductible IRA contributions.
Overall, as one might expect, the expansion of IRAs tends to benefit higher-
income individuals, although the benefits are constrained for very-high-income
individuals because of the contribution and income limits. An expansion in
contribution limits (as occurred in 2003) 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.
Administrative Issues
The more types of IRAs that are available, the larger the administrative costs
associated with them. With the introduction of back-loaded Roth accounts in 1997,
three types of IRAs now exist: the front-loaded that have been available since 1974
(and universally available in 1981-1986), the non-deductible tax deferred accounts,
and the back-loaded Roth 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 arises is the possibility of penalty-free
withdrawals prior to retirement for special purposes. These special purposes include
using the distribution for unreimbursed medical expenses, buying or building a first
home, and higher-education expenses. Each special purpose has separate conditions
placed on the distribution. For example, the first-time-homebuyer early distribution
is limited to $10,000, and the medical expenses early distribution can occur only if
unreimbursed medical expenses exceed 7.5% of adjusted gross income.23
22 Sarah Holden, Kathy Ireland, Vicky Leonard-Chambers, and Michael Bogden, “The
Individual Retirement Account at Age 30: A Retrospective,” ICI Perspective, vol. 11, no.
1 (Feb. 2005).
23 The tax rules are explained in the 100-page guide for preparing 2004 tax returns. See
Internal Revenue Service, Individual Retirement Arrangements (IRAs), Publication 590,
2005.

CRS-16
Policy Implications of Traditional and Roth IRAs
Many individuals now have a choice between a front-loaded deductible
traditional IRA and a back-loaded Roth 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 national
policy objectives. These objectives include reducing the federal budget deficit and
federal debt, increasing national savings, and increasing retirement savings.
From a budgetary standpoint, the short-run estimated cost of the front-loaded
deductible traditional IRA will better reflect the eventual long-run budgetary costs
of IRAs than does the back-loaded Roth IRA. Roth IRAs have probably made it
harder to meet long-run budgetary goals because the budget cost is incurred in the
future as the nontaxed account earnings grow and budget targets do not take into
account the out-year costs (that is, the costs beyond the five- or 10-year budget
window). This issue can be important if the long-term objective is balancing the
budget or generating surpluses. Achieving this goal can be compromised 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 will emerge with the front-loaded IRA.
The deductible traditional IRA is more likely to result in more private savings
than the Roth IRA, from the perspective of either conventional economic theory or
the “psychological” theories advanced by some. In fact, Roth IRAs may not have
contributed to private savings. Of course, a traditional IRA also has a revenue cost
which offsets any positive private savings effect. The ultimate impact of traditional
IRAs on national saving depends on the relative magnitudes of the revenue costs and
the private saving effect.
While the IRA tax incentives may not have appreciably increased national
savings, they have probably increased retirement savings by individuals.24 The
severe penalties for early withdrawals increase the likelihood these funds will be
available at retirement. The increase in retirement savings is becoming more
important as the old-style defined benefit pension plans are either eliminated or
replaced by less generous and riskier defined contribution plans such as 401(k) plans.
There are, however, some policy advantages of Roth IRAs. The Roth IRA
avoids one planning problem associated with deductible traditional IRAs: individuals
may fail to recognize the tax burden associated with accumulated IRA assets. If this
is the case, the deductible IRA would leave them with less after-tax assets in
retirement than they had planned, a problem that would not arise with the Roth IRA,
where no taxes are paid at retirement. Another possible advantage of Roth 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.
24 See Employee Benefit Research Institute, “Universal IRAs and Deductible Employee
Contributions,” EBRI Issue Brief #1 (Jan. 1982), at [http://www.ebri.org/publications/ib],
visited Nov. 14, 2005.

CRS-17
Recent Proposals
In the FY2006 budget proposal, the President proposed consolidating the
traditional and Roth IRAs into a single Retirement Savings Account (RSA). The
RSA would be modeled on the Roth IRA. The annual contribution limit would be
$5,000, which would be indexed to inflation. Individuals may contribute up to the
maximum amount regardless of their adjusted gross income. Contributions would
not be tax deductible, but investment earnings would accumulate tax free and
qualified distributions would not be taxable. Nonqualified distributions exceeding
the value of contributions would be subject to regular income taxes and a 10%
penalty tax. The President also proposed creating Lifetime Savings Accounts (LSAs)
with an annual contribution limit of $5,000, which would be similar to RSAs but
could be withdrawn penalty-free at any time.
The President’s Advisory Panel on Federal Tax Reform proposed similar
changes. This plan would create Save for Retirement Accounts (SRAs) to replace
traditional and Roth IRAs. Contributions up to $10,000 annually could be made
regardless of adjusted gross income. The contribution limit would be indexed to
inflation. Contributions would not be tax deductible but investment earnings would
accumulate tax free. Early distribution exceeding the value of contributions would
be subject to regular and penalty taxes.
The Advisory Panel also proposed the creation of Save for Family Accounts
(SFAs) to replace existing education and medical savings accounts. This proposal
would allow every taxpayer to contribute up to $10,000 each year to an SFA on an
after-tax basis. The earnings would accumulate tax free in the same way as in the
current Roth IRA. Tax-free withdrawals would be allowed at anytime for qualified
educational and medical costs, or to purchase a primary residence. In addition,
taxpayers would be able to withdraw up to $1,000 tax free each year for any purpose.
Nonqualified distributions in excess of the $1,000 limit would be subject to income
taxes and a 10% penalty tax, similar to the penalty paid on nonqualified distributions
from the current Roth IRA.
For the same reasons that apply to Roth IRAs, none of these proposals would
appreciably increase national saving. Furthermore, it is unlikely that these proposals
would appreciably increase retirement saving. The LSA and SFA are probably more
attractive savings vehicles for workers than the retirement savings accounts (RSAs
and SRAs) because they have the same tax advantages as the retirement accounts, but
can be accessed penalty-free before retirement. Since less than a third of U.S.
families report that retirement is the most important reason for saving, it seems likely
most workers would save in the nonretirement accounts before saving in the
retirement accounts.25
With no income limits on owning any of these accounts, it also seems likely that
a considerable amount of existing savings would be transferred to these accounts.
25 Ana M. Aizcorbe, Arthur B. Kennickell, and Kevin B. Moore, “Recent Changes in U.S.
Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances,” Federal
Reserve Bulletin
, vol. 89 (Jan. 2003), pp. 1-32.

CRS-18
Consequently, tax expenditures would increase, especially beyond the typical budget
five- or 10-year horizon. This could dramatically increase future budget pressures.
The Congressional Budget Office estimates that the President’s savings proposal
would reduce federal revenues by about $2 billion between 2006 and 2015.26
Revenues would initially rise as funds are moved from tax-deductible accounts to
RSAs and LSAs. After 2010, however, revenues would fall somewhat as
withdrawals from RSAs and LSAs go untaxed. Another study projects that the long-
run revenue costs could reach $30 to $50 billion per year.27
Although 60% of U.S. families saved in 2000, there are income disparities: 30%
of the poorest 20% of families saved while over 80% of the richest 10% of families
saved.28 These proposals would predominantly benefit higher-income individuals
and families who are the ones likely to save.
Conclusions
The initial purpose of IRAs in 1974 was to extend the tax advantages allowed
to employees with pension plans to individuals with no pension coverage. The major
focus of IRAs today is generally to encourage savings, especially for retirement. If
the main objective of individual retirement accounts is to encourage private and
national savings, the analysis in this study suggests that this objective has not been
achieved. Moreover, the back-loaded Roth approach is less likely to induce savings
than the traditional form of IRAs. However, IRAs have undoubtedly increased
longer-term saving for retirement. But, the ability to withdraw amounts for purposes
other than retirement somewhat dilutes this focus on preparing for retirement. The
recent and planned expansions in the IRA limit may make the provisions more likely
to provide a marginal incentive, but will also direct the benefits towards higher-
income individuals.
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 to the extent 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 of IRAs
suggest that the benefits still accrue primarily to higher-income individuals.
Based on conventional economic theory and the aforementioned empirical
evidence on savings effects, the RSA and LSA proposals of the Bush Administration,
which are back-loaded Roth-style savings accounts, appear unlikely to significantly
26 Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for
Fiscal Year 2006
, Mar. 2005, p. 16.
27 See CRS Report RL32228, Proposed Savings Accounts: Economic and Budgetary Effects,
by Jane G. Gravelle and Maxim Shvedov.
28 Ana M. Aizcorbe, Arthur B. Kennickell, and Kevin B. Moore, “Recent Changes in U.S.
Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances,” Federal
Reserve Bulletin
, vol. 89 (Jan. 2003), pp. 1-32.

CRS-19
affect national saving and could exacerbate future budgetary pressures. Furthermore,
since these proposals are not limited to lower-income individuals and families, the
benefits would primarily accrue to higher-income individuals.

CRS-20
Appendix: A History of IRA Proposals
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 were allowed. Deductible
contributions were limited to $2,000 or total earnings, whichever was 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 nondeductible contributions and take advantage of tax deferral on
investment earnings.
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 type of 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 have been rolled over and
would not have been subject to tax on earnings (only on original contributions); there
were also special purpose withdrawals with a five-year holding period.
The Administration’s proposal in 1990 for Family Savings Accounts (FSAs)
also used a back-loaded approach with contributions allowed up to $2500. No tax
would have been imposed on withdrawals if held for seven years, and no penalty
(only a tax on earnings) if held for three 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 have been 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

CRS-21
“special IRA.” No tax would have been applied if funds had been held for five years
and no penalties would have applied if used for “special purpose withdrawals.”
In 1992 the President proposed a new IRA termed a FIRA (Flexible Individual
Retirement Account) which would have 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
have been applied for funds held for seven 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 five-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 have extended 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 five 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 have
been 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
nondeductible or “back-loaded” IRA regardless of income, termed the American
Dream Savings (ADS) account. The back-loaded IRA did not provide a tax
deduction up front, and did 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

CRS-22
five years and used for qualified purposes: withdrawals after age 59½, 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 nonqualified
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
was 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 prior to 1999. Amounts rolled over must have
been included in income in equal increments over four 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 have been phased in: $30,000 to $40,000 for
single and $50,000 to $60,000 for joint in 1998-1989; $35,000 to $45,000 for single
and $60,000 to $70,000 for joint 2000-2001; $40,000 to $50,000 for single and
$70,000 to $80,000 for joint in 2002-2003. Individuals whose spouses were
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 had 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 the 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 was 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 have been 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 not one was enacted.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
gradually increases the contribution limits to IRAs. IRA limits increased to $3,000
in 2002-2004, to $4,000 in 2005-2007 and $5,000 in 2008. The limits will then be
indexed for inflation in $500 increments. Limits for catch-up contributions by
individuals over 50 years of age were $500 in 2002-2005 and will be $1,000 in 2006.
A nonrefundable tax credit for contributions to a qualified retirement plan including

CRS-23
IRAs beginning at 50%, but phasing down, is allowed for lower-income individuals.
Many of the provisions in EGTRRA will expire in 2010 unless extended by
Congress. H.R. 4, the Pension Protection Act passed by the House on July 29, would
make those expansions permanent.
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