A Roth IRA is a popular type of tax-advantaged individual retirement account that allows your investments to grow tax-free. You contribute taxed earnings, then won’t owe taxes on your withdrawals in retirement.
Roth IRAs, created in 1997, are still a fairly new type of retirement investing account compared to others such as a traditional IRA or 401(k). Learn more about the history of Roth IRAs, including why Congress created them, how the limits have changed, and how their history differs from traditional IRAs' history.
- Individual retirement accounts (IRAs) were established in 1974 to encourage employees without pensions to save for retirement.
- A traditional IRA allows workers to deduct their contributions, but then they pay taxes when they make withdrawals.
- The Roth IRA, established in 1997, allows workers to invest after-tax dollars and take tax-free distributions.
Roth IRA History
Individual retirement accounts, or IRAs, were first authorized by the Employee Retirement Income Security Act (ERISA) of 1974. The goal was to give all workers incentive to save for retirement, even if their employer didn’t offer a pension. The IRAs established by ERISA are now known as "traditional" IRAs, in which contributions are tax-deductible, but withdrawals are taxable.
At the time, Congress limited IRAs to workers who weren’t covered by a pension plan. The Economic Recovery Act of 1981 later extended eligibility to all workers and their spouses.
However, the Tax Reform Act of 1986 limited the tax break on contributions to workers who didn’t have a workplace retirement plan and whose income fell below certain thresholds.
Roth IRAs were established by the Taxpayer Relief Act of 1997, which also overhauled the rules for capital gains. The law reduced the maximum capital gains tax rates for individuals from 28% to 20%, and shielded many taxpayers from paying capital gains taxes on the sales of their homes.
Roth IRAs were named for their sponsor, the late Sen. William Roth (R-Del.). They differed from traditional IRAs in that instead of making deductible contributions, account holders could make after-tax contributions, then make withdrawals tax-free in retirement, including on investment gains.
Roth allows for tax-free withdrawals on earnings once the owner is 59½ and has had the account for at least five years. You can withdraw contributions from a Roth anytime.
While individuals older than 70½ couldn’t contribute to a traditional IRA, individuals with earned income could fund a Roth IRA regardless of age. (The Secure Act of 2019 eliminated age restrictions.) Also, while traditional IRAs have required minimum distributions (RMDs), Roth IRA accounts do not require you to take distributions at all.
Roth IRA vs. Traditional IRA
|Roth IRA||Traditional IRA|
|Established||Taxpayer Relief Act of 1997||Employee Retirement Income Security Act of 1974 (ERISA)|
|How they work||Contributions are not deductible; withdrawals are made tax-free||Contributions are deductible; withdrawals are taxed as income|
|Original eligibility rules||For workers with incomes below certain thresholds||For workers not covered by a pension plan|
Traditional IRAs were established in 1974 under the Employee Retirement Income Security Act (ERISA). In 1997, Congress approved the Taxpayer Relief Act of 1997, which created Roth IRAs.
How They Work
With a Roth IRA, you make contributions after you’ve paid taxes on the earnings, then you can take tax-free distributions on earnings at age 59½ if you have had the account open at least five years.
You can make withdrawals of your contributions to a Roth IRA anytime with no penalty. In contrast, contributions to a traditional IRA are deductible for many taxpayers. However, withdrawals are then taxed as ordinary income in retirement.
Original Eligibility Rules
When ERISA established traditional IRAs in 1974, they were limited to workers who weren’t covered by a workplace pension plan. Traditional IRAs became available to all workers and their spouses in 1981 through the Economic Recovery Act.
Income limits applied to Roth IRAs since they became available in 1998. At the time, single filers could make the full contribution if their income was $95,000 or less, or a phased-out amount if their income was between $95,000 and $110,000.
Married couples filing a joint tax return could make the full Roth IRA contribution if their combined income was less than $150,000, and a phased-out amount if their incomes were between $150,000 and $160,000. Those earning more than $160,000 weren’t eligible to fund a Roth IRA.
Roth 401(k) History
Roth 401(k)s didn’t become available until 2006. A Roth 401(k) is essentially a hybrid plan that allows employees to invest after-tax dollars, but unlike a Roth IRA, these accounts do have required minimum distributions by age 70½.
Sen. Roth advocated for the creation of Roth 401(k)s in 1999 to allow tax-free growth when workers invested after-tax dollars in their employers’ retirement plans. The goal was to provide more incentives to Americans to save for their retirements. As of 2020, more than 86% of 401(k) plans featured a Roth option, according to the Plan Sponsor Council of America.
How Contribution Limits Change Over Time
The Economic Growth and Tax Relief Reconciliation Act of 2001 increased the IRA contribution limit to $3,000 and also allowed workers 50 and older to make catch-up contributions. It also pegged IRA contribution limits to inflation.
The IRS typically releases IRA contribution limits each November, and often reports adjustments. In 2022, the maximum contribution for both a Roth IRA and traditional IRA is $6,000, which hasn’t changed since 2019. Individuals who are 50 and older can make an extra $1,000 catch-up contribution.
Frequently Asked Questions (FAQs)
How do you open a Roth IRA account?
You can open a Roth IRA at a financial institution including brokerage firms, banks, and credit unions. Once you’ve opened the account, you’ll transfer money from your bank account, then select investments.
When can you withdraw from a Roth IRA?
You can withdraw Roth IRA contributions tax- and penalty-free whenever you want. However, if you withdraw investment earnings, you could owe taxes and a 10% penalty if you take distributions before age 59½ or if you haven’t held the account for the five-year minimum.
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Congressional Research Service. “Traditional and Roth Individual Retirement Accounts (IRAs): A Primer.”
Library of Congress. “Taxpayer Relief Act of 1997.”
U.S. Congress. “Taxpayer Relief Act of 1997.”
U.S. Bureau of Labor Statistics. “Another Retirement Savings Option: Roth 401(k) Plan.”
Plan Sponsor Council of America. “Retirement Plans Are Looking More SECURE | Plan Sponsor Council of America.”
IRS. “2021 Publication 590-B.”