In 1974, the Individual Retirement Account (IRA) was born, and since its inception more than 43 million Americans have created at least one IRA account for their retirement savings. Over the years the IRA has transformed greatly and has the potential to continue to evolve over the coming years. In fact, the IRA today bears almost no resemblance to the retirement vehicle that was created forty years ago.
Brief History of the IRA
When the IRA was first introduced in 1974, it was only available to employees who were not already sponsored by employer plans. The maximum contribution per year was only $1,500, and 401(k) plans did not yet exist. In 1981, the IRA saw a massive increase in the number of accounts when a new tax law let anyone under the age of 70.5 years old contribute as well as increased the annual maximum amount of contribution to $2,000.
However, the Tax Reform Act of 1986 phased out the deduction for IRA contributions among the wealthy employees that were already covered by employer-sponsored plans. Since then, there has not been much significant change to the IRA outside of the creation of the nondeductible Roth IRA, the retirement withdrawals of which are typically tax-free. In addition, the maximum amount that a person can contribute per year has increased to $5,500 in 2015 and $6,500 for people over the age of fifty years.
Transformation of the IRA
IRAs today are mostly IRA rollover accounts, a place where an employee can move their employer-sponsored accounts when they leave their job and keep the money until they make withdrawals in retirement. Now, only eighteen percent of workers who are not offered a 401(k) plan save their money for retirement in an IRA.
Because most IRAs are rollover plans, they typically hold much more money than a defined benefit pension plan or a 401(k). In fact, the Federal Reserve reported in 2014 that there were $3.1 trillion in pensions, $5.3 trillion in 401(k)-type plans and $7.2 trillion invested into IRAs. Compare that to the numbers in 1981, when there was only $4 billion in IRA accounts.
The Future of IRAs
Legislators and employers are starting to look at IRAs once again as a source of retirement savings, instead of simply a bridge for employer-sponsored plans. In the coming years, experts expect to see an enormous growth in the number and value of IRA rollover accounts as an increasing number of Baby Boomers transfer their 401(k) money into an IRA when they prepare to retire. To put that in perspective, nearly 10,000 people from the Baby Boomer generation turn 65 years old every single day.
In addition, the Obama administration instituted the MyRA plan, which will begin in earnest this year. The MyRA has a lot of similarities to the original IRA of 1974 – this vehicle is a nondeductible Roth IRA for employees whose employers do not offer retirement plans and will be limited to people that make under $129,000 per year (or couples that make under $151,000). Some states are also developing their own automatic IRA accounts for citizens that do not have access to employer-sponsored retirement plans. For example, Illinois is rolling out its “Secure Choice Savings Program” starting in 2017.