What Year Did IRA Deductions Start?

By: Victoria Lee Blackstone | Updated December 28, 2018

Putting aside money for the golden years of retirement comes with a variety of options, including the individual retirement arrangement (IRA). An IRA is a preferred savings vehicle for many taxpayers because of an appealing tax advantage – being able to take IRA deductions for the contributions you make, which reduces the income tax you have to pay. But in the history of the U.S. workforce’s retirement plans, the IRA option is a comparative new kid on the savings block. And it all started in 1974 with the Employee Retirement Income Security Act (ERISA).

ERISA Brought Sweeping Changes

In 1875, the American Express Co. created the first employee-based pension plan. It was almost 100 years later – in 1974 – when Congress enacted ERISA. Between 1875 and 1974, most workers depended on their company pensions to sustain them financially in their retirement years. But the passage of ERISA changed this status quo. ERISA not only regulated pension plans, retirement plans and health care plans, but it also allowed workers who were not covered by employee pension plans to contribute to an IRA.

IRAs in the 1970s

From 1974 to 1981, IRAs were only available to employees who were not covered by their employer’s pension plans. Workers could contribute up to $1,500 each year into their IRAs, and whatever amount they contributed reduced their taxable income by the same amount. Another perk was that the money in an IRA was tax-deferred. This meant that it continued to grow tax-free as it earned interest, and it was only taxed when it was withdrawn from the IRA.

IRAs in the 1980s

In 1981, with the passage of the Economic Recovery Tax Act (ERTA), all taxpayers could contribute to an IRA for themselves (up to $2,000) and their nonworking spouses (up to $250), as long as they were younger than 70 ½ years of age. In 1986, the Tax Reform Act (1986 TRA) eliminated IRA tax deductions for high-income taxpayers who were also covered by an employee-based retirement plan or whose spouses were covered by such a plan.

IRAs in the 1990s

In 1996, the passage of the Small Business Job Protection Act (SBJPA) expanded the parameters of IRAs. Contribution limits increased from $250 to $2,000 for nonworking spouses. The next year, the Taxpayer Relief Act (1997 TRA) introduced even more changes, including the increase of contribution phase-out limits for high-income taxpayers.

The 1997 TRA also introduced a significant addition to the world of traditional IRAs – the Roth IRA. Taxpayers could not claim deductions for their contributions to Roth IRAs. But in a flip-flop move compared to traditional IRAs, Roth IRA contributions were taxed before being deposited, which meant that withdrawals from these accounts were tax-free.

IRAs in the 2000s

Annual IRA contribution limits increased to $5,000 for each qualifying person under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Taxpayers who were 50 years and older could also make catch-up contributions up to $1,000. With EGTRRA’s expiration date in 2010, contribution limits continued to increase. From 2015 through 2018, the maximum contribution for a taxpayer's combined IRAs increased to $5,500 ($6,500 for taxpayers age 50 or older).

2019 IRAs

For the 2019 tax year, your total IRA contributions cannot exceed $6,000 ($7,000 if you’re age 50 or older) or the amount of your taxable income (if your income is less than your allowable maximum contribution). You can no longer contribute to your IRA in the year you reach age 70 ½, unless you have a Roth IRA, which has no maximum age limit for contributions.

IRA Allowable Income Sources

Compensation you receive may be “earned income,” “unearned income” or a combination of the two sources. But only your earned income can contribute to an IRA, which is compensation you earn from working. Sources of allowable income include wages, salaries, tips, commissions and self-employment income. Unearned income, which is not IRA-allowable, includes pensions, dividends and interest income. Even though alimony and separate maintenance are unearned income, they are allowed by the IRS to count toward your IRA contributions.

Traditional IRA Deductions

Taking an IRA deduction, which reduces your taxable income, is not the same as claiming the standard deduction or itemizing deductions on your income tax return. You can take an IRA deduction regardless of whether you claim other deductions. And if neither you nor your spouse is covered by an employer’s retirement plan, you can deduct the full amount of your IRA contributions. But if either you or your spouse is covered by a workplace retirement plan, the amount of your IRA contributions may be reduced.

Traditional IRA Reduced Deductions

If you or your spouse is covered by a workplace retirement plan, first determine your modified adjusted gross income (AGI) by using Worksheet 1-1 in IRS Publication 590-A (Contributions to Individual Retirement Arrangements [IRAs]). Visit IRS.gov/forms and search for this publication to view, download or print it. This eight-line worksheet walks you through a step-by-step calculation to compute your modified AGI, which you enter on Line 8. Transfer this amount to Line 2 on Worksheet 1-2 and follow the instructions to complete the rest of the worksheet, which determines the amount of the reduced IRA contribution that you can deduct on your income tax return.

Tax filing statuses and income limits for the 2018 tax year:

  • Single, head of household or married filing separately (and you didn’t live with your spouse at any time during the year). If your modified AGI is $63,000 or less, you can take the full contribution limit. If your modified AGI is more than $63,000 but less than $73,000, you’ll have to take a partial deduction. And if your modified AGI is $73,000 or more, you can’t take any deduction.
  • Married filing separately (and you lived with your spouse at any time during the entire tax year). If your modified AGI is less than $10,000, you can take a partial deduction. If your modified AGI is $10,000 or more, you can’t take any deduction.
  • Married filing jointly, or qualifying widow(er). If your modified AGI is $101,000 or less, you can take the full contribution limit. If your modified AGI is more than $101,000 but less than $121,000, you’ll have to take a partial deduction. And if your modified AGI is $121,000 or more, you can’t take any deduction.

Tax filing statuses and income limits for the 2019 tax year:

  • Single, head of household or married filing separately (and you didn’t live with your spouse at any time during the year). If your modified AGI is $64,000 or less, you can take the full contribution limit. If your modified AGI is more than $64,000 but less than $74,000, you’ll have to take a partial deduction. And if your modified AGI is $74,000 or more, you can’t take any deduction.
  • Married filing separately (and you lived with your spouse at any time during the entire tax year). If your modified AGI is less than $10,000, you can take a partial deduction. If your modified AGI is $10,000 or more, you can’t take any deduction.
  • Married filing jointly, or qualifying widow(er). If your modified AGI is $103,000 or less, you can take the full contribution limit. If your modified AGI is more than $103,000 but less than $123,000, you’ll have to take a partial deduction. And if your modified AGI is $123,000 or more, you can’t take any deduction.

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About the Author

Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.

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