Ever Changing IRAs

Ever Changing IRAs

Every year taxpayers ask if they should do an Individual Retirement Account and if it should be  a Traditional IRA or a Roth IRA. No matter which professional they ask, they get the same answer. Well, it depends.

In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA) in an effort to legislate protection of employee pension accounts. Out of ERISA came the Individual Retirement Account (IRA). Individuals could contribute to a retirement savings account and reduce their taxable income by the same amount. The IRA earnings were not taxed until withdrawn. Reagan’s Tax Reform Act of 1986 (TRA 1986) started phasing out the deductions for higher income taxpayers if they were covered under an employment-based retirement plan. Ten years later, under the Small Business Job Protection Act of 1996 (SBJPA), non-working spouses could contribute the same amount as the taxpayer.

The next year, the Taxpayer Relief Act of 1997 (TRA 1997) increased the phase-out limits for higher income taxpayers and allowed more taxpayers not covered by an employment based plan to make contributions.  The 1997 TRA also introduced the Roth IRA which allowed for contributions from after-tax income, thus no tax on withdrawals, but also no deduction of the amount contributed which has to stay in the Roth for five years or get taxed. In 2001, EGTRRA boosted contribution limits to $5,500 per person per year. It also allowed for “catch-up” contributions for taxpayers 50 and over of up to $1,000. Phase out and other income limitations still applied.

The timeline above stopped 16 years ago. There have been many more changes since 2001, and the income phase-out limit for the Roth keeps going down. The good news is that there are other ways to open a Roth account that only your financial advisor can explain. That is why we urge you to meet with us every year in the fall for a review while there is still time to take action. See you soon.

Raskob Kambourian Financial Advisors is an independent, fee-only comprehensive financial advisory firm registered with the Securities and Exchange Commission.  We offer expertise, competitive pricing, and personalized financial services to meet your “Life Planning” needs.