Order Code 96-20 EPW
Updated January 10, 2001
CRS Report for Congress
Received through the CRS Web
Individual Retirement Accounts (IRAs):
Legislative Issues in the 106th Congress
James R. Storey
Specialist in Social Legislation
Domestic Social Policy Division
Bills introduced in the 106th Congress would have raised the limit on contributions
to individual retirement accounts (IRAs) and eased other federal IRA rules. The House
passed H.R. 5203, incorporating the higher IRA contribution limits of H.R.1102, on
September 19, 2000. The IRA provisions of the bill would have cost $21.7 billion in
foregone revenue over 10 years. The Senate Finance Committee ordered H.R. 1102
reported (with amendments) on September 7, 2000, but the bill did not reach the Senate
floor before the 106th Congress adjourned in December 2000. The Finance Committee’s
bill, in addition to raising contribution limits, would have allowed tax credits in lieu of
deductions for a portion of IRA contributions.
In 1971, President Nixon proposed that workers be allowed to defer from taxable
income an amount of earnings set aside in an IRA. IRAs were first authorized by the
Employee Retirement Income Security Act (ERISA) of 1974 (P.L. 93-406) for workers
not covered by employer pension plans. They could make tax-deferred IRA contributions
up to the lesser of $1,500 a year or 15% of earned income. In 1981, the Economic
Recovery Tax Act of 1981 (P.L. 97-34) raised the contribution limit to the lesser of
$2,000 or 100% of earnings and made all workers eligible. A total of $2,250 could be
contributed by a worker and a nonworking spouse. The Tax Reform Act of 1986 (P.L.
99-514) restricted IRA tax deferrals to: (1) workers with no employer plan coverage; and
(2) workers in employer plans who meet an income test. Married couples were treated as
having employer coverage if at least one spouse had such coverage.
In the 1990s, pressure built to restore tax deferrals, ease early withdrawal penalties,
and allow “backdoor” IRAs that receive taxable contributions and pay tax-free benefits.
Between 1992 and 1995, Congress passed such provisions three times in bills that were
vetoed. However, penalty-free withdrawals for certain health expenses (P.L. 104-191) and
a separate $2,000 contribution limit for nonworking spouses (P.L. 104-188) did become
law. Major IRA changes finally were adopted in the Taxpayer Relief Act of 1997 (P.L.
Congressional Research Service ˜ The Library of Congress
105-34). It authorized the Roth IRA, which accepts only after-tax contributions and
provides tax-free distributions. This law also raised the income limits on tax deductibility
for contributions to traditional IRAs by workers with employer pension coverage, and it
allowed a spouse who lacks employer coverage to make deductible contributions to
traditional IRAs independent of the partner’s coverage status. The 1997 law authorized
penalty-free early withdrawals if used for higher education or a first-home purchase.
Rules for Tax Year 2000
There are two types of IRAs–traditional and Roth. Income tax is deferred on
contributions to a traditional IRA and on investment earnings until funds are withdrawn,
at which time all withdrawals are taxable. (Traditional IRAs also may receive taxable
(“nondeductible”) contributions, which still accrue tax-deferred investment earnings.)
Contributions are taxed when contributed to a Roth IRA, but investment earnings may be
withdrawn tax free if the Roth IRA was opened at least 5 years earlier and withdrawals
occur after age 59½ (or are otherwise exempt from the 10% early withdrawal tax).
The lesser of $2,000 or 100% of earnings can be contributed yearly to IRAs. A
spouse with little or no earnings also can contribute up to $2,000, but a couple’s combined
contributions cannot exceed their joint earnings. An IRA must be a separate trust account
held by an approved financial institution. IRA funds can be moved tax-free to a like IRA
once a year. Lump-sum distributions from employer plans usually can be transferred taxfree (rolled over) to traditional IRAs without limit.
Contributions to a traditional IRA that qualify for tax deferral are netted from income
before computing tax liability. A full $2,000 contribution can be deferred by an employed
person only if the worker (1) lacks coverage by an employer-sponsored plan, or (2) has
adjusted gross income (AGI) of $32,000 or less ($52,000 for joint filers). Filers may defer
some fraction of $2,000 when AGI falls between $32,000 and $42,000 ($52,000 and
$62,000 for joint filers). A worker’s nonworking spouse can defer a $2,000 contribution
if joint AGI does not exceed $150,000; partial deferral is allowed up to AGI of $160,000.
Up to $2,000 can be contributed to a Roth IRA by single filers with AGI of $95,000 or
less ($150,000 or less for joint filers). Roth IRA eligibility phases out at AGI of $110,000
($160,000 for joint filers). The annual sum of an individual’s contributions to all IRAs
cannot exceed $2,000.
Withdrawals from an IRA before age 59½ incur a 10% excise tax on taxable amounts
withdrawn unless withdrawals are because of: death; disability; conversion of the asset to
a lifetime annuity; medical expenses that exceed 7.5% of AGI; the need to pay health
insurance premiums while unemployed; higher education expenses; or purchase of a first
home. This 10% tax is in addition to any income tax owed on the withdrawal.
Withdrawals must begin by April 1 of the year after the year that the account holder attains
age 70½, at a rate that will consume the IRA over the expected remaining lifespan(s) of
the account holder (and beneficiary). A breach of this rule triggers a 50% excise tax on
the deficiency. Mandatory withdrawals are not required from Roth IRAs.
A traditional IRA can be converted to a Roth IRA by persons with AGI no greater
than $100,000 (for single or joint filers), but income tax is due on transferred amounts not
already taxed. Beginning in 2005, P.L. 105-206 will make it easier for persons over age
70½ to convert traditional IRAs to Roth IRAs by allowing mandatory IRA withdrawal
amounts to be netted from AGI when applying the AGI eligibility limit on IRA
When an account holder dies, a spouse beneficiary may treat an inherited IRA as
his/her own, making it subject to the usual IRA rules regarding distribution and taxation.
An IRA inherited by a spouse is not subject to the federal estate tax. A nonspouse
beneficiary cannot treat an inherited IRA as his/her own and usually must take distributions
from it fast enough to liquidate it over either a 5-year period or the beneficiary’s life
expectancy. The federal estate tax may apply to this beneficiary if the estate’s total value
including the IRA exceeds an exempt threshold ($675,000 in 2000).
Proposals in the 106th Congress
Table 1 lists the IRA proposals found in bills introduced in the 106th Congress. H.R.
5203, incorporating the IRA provisions of H.R. 1102, was passed by the House on
September 19, 2000. H.R. 1102 was ordered reported (with amendments) by the Senate
Finance Committee on September 7, 2000, but it did not reach the Senate floor before the
106th Congress adjourned in December 2000.
Eligibility for IRA Tax Deferrals
Initially, IRA eligibility was limited to workers with no employer pension coverage.
Participation rose quickly when all workers became eligible in 1981 but fell sharply after
deferrals were curbed in 1986. In 1995, 4.2% of tax filers with wage and salary income
made tax-deferred contributions, down from 18.6% in 1985. Contributions in 1995 totaled
$7.6 billion, down 80% from 1985. Also, inflation has shrunk the population eligible for
deferral. Had the $35,000 and $50,000 AGI deferral limits set in 1986 been indexed for
inflation, they would have exceeded $52,000 and $74,000, respectively, by 1998.
Table 1. IRA Proposals Introduced in the 106th Congress
Increase income limits for deductibility of contributions
H.R. 188, H.R. 876, H.R. 1102, S. 476
End income limits for deductibility of contributions
H.R. 1546, S. 649
Allow partial credit of contribution in lieu of deduction
H.R. 226, H.R. 1102, H.R. 1590, H.R.
End phaseout of deductibility based on spouse pension
Increase contribution limit
H.R. 188, H.R. 802, H.R. 876, H.R.
1102, H.R. 1322, H.R. 1357, H.R.
1546, H.R. 1840, H.R. 4843, H.R.
5203, S. 593, S. 649, S. 799, S. 1379,
S. 2671, S. 2740
Set higher contribution limit for those age 50 and older
H.R. 1102, H.R. 4546, H.R. 4843,
Index income limits on deductibility for inflation
H.R. 188, H.R. 876
Index contribution limit for inflation
H.R. 188, H.R. 876, H.R. 1102, H.R.
1322, H.R. 1546, H.R. 1840, H.R.
4843, H.R. 5203, S. 593, S. 649, S.
1013, S. 1379, S. 2671
Coordinate contribution limits with §401(k) plan limits
Allow added “trade bonus” contributions for workers
Allow “2nd chance” makeup contributions for years when
no contribution was made
Allow penalty-free early withdrawal when unemployed
H.R. 188, H.R. 876, H.R. 1590, S. 476
Allow penalty-free early withdrawal for long-term care
H.R. 188, S. 476
Allow penalty-free early withdrawal for medical expenses
of accountholder, lineal ancestors, and descendants
H.R. 188, H.R. 876, S. 476
Allow penalty-free early withdrawal for elementary and
secondary education expenses
Allow penalty-free early withdrawal for adoption expenses
Allow penalty-free early withdrawal if spouse dies or
Allow penalty-free early withdrawals by disaster-area
residents to repair property
Allow tax-free withdrawal to buy long-term care insurance
Allow tax-free withdrawal for charitable donations
H.R. 1102, H.R. 1311, H.R. 1607,
H.R. 4433, S. 997, S. 1086
Forgive income tax on penalty-free early withdrawals if
repaid to IRA in 5 years
Allow loan from IRA to buy first home
H.R. 1333, S. 1994
Allow IRA to invest in first home of accountholder or
Repeal mandatory withdrawal requirement after age 70½
Increase age when minimum distributions must begin
S. 741, S. 2180
Set standards for coins in which IRA can be invested
H.R. 3052, S. 163
Allow inherited IRA to be held by heir until age 70½
Exclude inherited IRA from taxable estate
H.R. 188, H.R. 2058
Allow rollover of inherited §401(k) to IRA
Allow rollover of gain from farm sale to IRA
Allow rollover of gain from home sale to IRA
Allow rollover from §457 plan to IRA
H.R. 554, H.R. 739, H.R. 833, H.R.
1102, H.R. 1213, H.R. 1590, H.R.
3081, H.R. 4843, H.R. 5203, S. 741,
S. 1357, S. 2671
Allow rollover of IRA to employer plan
H.R. 739, H.R. 833, H.R. 1102, H.R.
1213, H.R. 3081, H.R. 4843, H.R.
5203, S. 741, S. 1357, S. 2671
Allow rollover of up to $3,000 from cafeteria plan to IRA
Authorize payroll deduction IRAs
H.R. 1102, H.R. 1213, H.R. 1590,
H.R. 5203, S. 649, S. 741
Allow “Child Savings Account” within Roth IRA, funded
in part by extra child tax credit for contributor
End income limit for eligibility to contribute to Roth IRA
H.R. 1546, S. 649, S. 1013
Raise income limit for eligibility for joint filers to
contribute to Roth IRA
Allow 4-year averaging of income tax on amount converted
from traditional IRA to Roth IRA through 2003
End income limit for conversion of traditional to Roth IRA
Increase income limit for eligibility to convert traditional
IRA to Roth IRA
H.R. 1102, H.R. 1546, S. 649, S. 1344
Exempt IRAs from bankruptcy proceeding unless
exemption waived by account holder
The Taxpayer Relief Act of 1997 (P.L. 105-34) raises over 10 years the income limits
for tax-deferral of IRA contributions (Table 2); in 2007, it will widen (from $10,000 to
$20,000) the phase-out interval for deductibility for joint filers. However, this law does
not offset fully the inflationary erosion in these limits. The version of H.R. 1102 reported
by the Senate Finance Committee would have speeded up the phase-in of the increases in
these limits already in law.
Table 2. AGI Limits for Full IRA Deductibility Under P.L. 105-34a
2007 & later
These AGI limits apply to tax filers who have employer pension coverage. Full deductibility is allowed
for a filer’s uncovered spouse up to a joint AGI of $150,000 for 1998 and later years.
P.L. 105-34 ended the denial of tax deferrals to those whose spouses have employer
plan coverage, if an income limit is met. That is, if only one spouse in a joint filing unit has
employer coverage, the uncovered spouse can deduct contributions fully if the filing unit’s
AGI is below $150,000. Partial deductions are allowed if AGI is below $160,000.
Some argue against larger IRA tax deferrals because the revenue lost will benefit
mainly higher-income workers, who also are more likely to have employer pensions. In
1985, a year before deferrals were limited, only 8% of tax filers with AGI between
$10,000 and $20,000 reported IRA contributions compared to 58% with AGI above
$50,000. The Senate version of H.R. 1102 would have offered low- and moderate-income
tax filers partial tax credits in lieu of deductions for their IRA contributions, because
credits are worth more than deductions to lower-income taxpayers.
Annual IRA Contribution Limits
The $2,000 IRA limit is not adjusted for inflation. Had the original 1975 limit of
$1,500 been adjusted yearly, it would have exceeded $5,300 in 2000. Had the $2,000 limit
set in 1981 been adjusted, it would have exceeded $4,100 in 2000. Both H.R. 1102 and
H.R. 5203 would have raised the limit in three steps to $5,000 and then require yearly
inflation adjustments. Even higher limits would apply for filers age 50 and older. Foes
argue that expanding IRAs yields little new saving because part of new IRA contributions
would be saved anyway in some other form, even without additional tax breaks.
Penalties for Early Withdrawals from IRAs
A 10% tax discourages early use of IRA assets. Some experts advocate tougher rules
for early withdrawals, fearing that too many people will use IRA funds before old age and
deplete their retirement assets. P.L. 105-34 expanded penalty-free withdrawals, allowing
them for higher education costs and first-home purchases (lifetime limit of $10,000).
Proposals would extend penalty-free withdrawals to: long-term care costs, medical
expenses of relatives, expenses while jobless for 12 or more weeks, elementary and
secondary education costs, adoption expenses, and property repair costs in disaster areas.
Tax-free withdrawals are proposed for: the purchase of long-term care insurance; and
charitable donations. The latter option was included in the Senate version of H.R. 1102.
An IRA inherited from a spouse can be converted to the heir’s own IRA, thereby
limiting income taxes. The IRA also qualifies for the spousal exemption from the federal
estate tax. However, a nonspouse beneficiary must take distributions from an inherited
IRA, and the IRA may be subject to estate taxation. H.R. 188 would have excluded all
inherited IRAs from the estate tax and allowed heirs to retain such IRAs until age 70½.
Eligibility for Roth IRAs
The Roth IRA permits tax-free withdrawals of assets that are funded by after-tax
contributions and held at least 5 years. To open a Roth IRA, AGI cannot exceed
$110,000 ($160,000 for joint filers). The Senate version of H.R. 1102 would have raised
the joint-filer limit to $220,000. There is a $100,000 AGI limit on eligibility to convert a
traditional IRA to a Roth. The Senate bill would have set a $200,000 limit for joint filers.