IRA Contribution Limits Over Time: Historical Timeline

The person retirement account, or IRA, has been round for practically half a century, a testomony to its unimaginable reputation amongst American staff. However over that point, these tax-advantaged accounts have undergone important adjustments by way of who’s eligible to make use of them and the way a lot homeowners can contribute.

We’ll check out how these contribution limits have advanced over time, and the way at this time’s cap compares to earlier durations within the IRA’s historical past when accounting for inflation.

Understanding IRA Contribution Limits

When Congress handed the Worker Retirement Earnings Safety Act of 1974—extra generally referred to as ERISA—the landmark laws created a brand new sort of retirement account geared particularly towards taxpayers with out an employer-provided pension.

With these new IRAs, staff might put aside as much as $1,500 per yr—or as much as 15% of their revenue, if it was much less—into the account. Their contributions wouldn’t be topic to revenue taxes, though distributions made in retirement would. The contribution quantity elevated to $2,000 in 1982.

In subsequent years, the IRA skilled some key adjustments. For instance, the Tax Reform Act of 1986 phased out the deductibility of contributions for these with greater incomes or with office retirement advantages.

The Taxpayer Reduction Act of 1997 created a brand new model of the account, referred to as the “Roth IRA,” the place staff contributed after-tax {dollars} however might withdraw tax-free funds in retirement. The Roth variant was significantly interesting to youthful staff and different traders who anticipated being in the next tax bracket after they retired. Since Roth accounts had been launched, they’ve had the identical contribution limits as conventional IRAs.

As of 2021, roughly 37% of U.S. households owned an IRA, in keeping with the Funding Firm Institute, with complete belongings of $13.2 trillion. The suppose tank estimates that these accounts comprise 35% of complete retirement asset within the U.S., up from 23% twenty years earlier than.

In fact, over time the contribution restrict on IRAs has modified significantly. In 2022, traders can put in as much as $6,000 per yr, or $7,000 in the event that they’re age 50 or older and qualify for the catch-up contribution. Nevertheless, the quantity you contribute can not exceed your annual compensation, if it is lower than these limits.

Whereas it is doable to personal a number of IRAs—even contributing to conventional and Roth variations concurrently—the annual restrict applies to at least one’s cumulative IRA contributions. In different phrases, for those who contribute $2,000 to at least one IRA, you possibly can solely put as much as $4,000 into your different IRAs ($5,000 for those who’re 50 or older).

Extra contributions are topic to a 6% tax per yr, which applies to the quantity above the restrict. Retirement belongings rolled over from a office plan or one other IRA, nonetheless, don’t rely towards the contribution restrict.

Timeline of IRA Contribution Limits

When the IRA was created in 1974, contribution limits weren’t pegged to inflation; it took an act of Congress to change the quantity that People had been capable of put in. In actual fact, it wasn’t till the Financial Restoration Act of 1981 that the cap was elevated for the primary time, bringing the restrict as much as $2,000 from $1,500.

For twenty years, 1982 by means of 2001, that quantity remained unchanged. It wasn’t till the Financial Development and Tax Reduction Reconciliation Act of 2001 that the IRA contribution restrict was quickly listed to inflation (it took impact the next yr). The 2001 legislation additionally created a “catch-up” provision that allowed savers age 50 and older to contribute an extra $500 per yr. A 2006 legislation made that indexing everlasting.

Supply: Funding Firm Institute

Due to the shortage of inflation adjustment early on, the contribution restrict as a proportion of median revenue fluctuated considerably throughout the first 27 years of the IRA’s existence. For example, in 1982 the contribution restrict of $2,000 represented 9.9% of what a typical family earned ($20,171). However by 2001—the final yr earlier than that cap was raised—that $2,000 cap correlated to simply 4.7% of the median U.S. family revenue.

Since inflation-indexing took impact in 2002, nonetheless, the connection between contribution limits and revenue has largely stabilized, if not utterly. For one, the federal government makes use of cost-of-living figures, not revenue, when adjusting IRA limits. Moreover, there is a lag between adjustments to the cost-of-living and when IRA limits are introduced for a given tax yr.

In 2010, as an illustration, IRA homeowners confronted a $5,000 restrict on contributions, or 10.1% of median family earnings.

By 2020, the restrict had elevated to $6,000 for these underneath age 49, which represented 8.9% of median family earnings, in keeping with census figures.

The Backside Line

The truth that IRA contribution limits are actually pegged to inflation is nice information for the thousands and thousands of People who personal these accounts. Earlier than that inflation-indexing occurred, the restrict dropped considerably as a proportion of median revenue, till Congress would are available in with laws to lift the ceiling.