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In 1981, the Economic Recovery Tax Act (ERTA) allowed all taxpayers under the age of 70½ to contribute to an IRA, regardless of their coverage under a qualified plan. It also raised the maximum annual contribution to $2,000 and allowed participants to contribute $250 on behalf of a nonworking spouse.The Tax Reform Act of 1986 phased out the deduction for IRA contributions among higher-earning workers who are covered by an employment-based retirement plan. However, those earning above the amount that allowed deductible contributions could still make nondeductible contributions to their IRA.

Today 43 million Americans have an IRA. Although the IRA has become hugely popular over the past 40 years, the IRA of today is quite different from the IRA of 1974. It used be a standard account where individuals would save a little bit of money. Now most people use these accounts as IRA rollovers to combine and consolidate employer sponsored 401(k) plans whenever they change jobs. 

In modern times, a very small population of workers without a 401(k) have an employer-independent IRA. Alicia H. Munnell, co-author of Falling Short: The Coming REtirement Crisis and What to Do About It and director of Boston College's Center for Retirement Research, described the drastic changes in the role of IRAs, “IRAs now hold more money than either defined benefit [pension] or 401(k) plans.

According to the Federal Reserve, in 2014 there were $3.1 trillion in pensions, $5.3 trillion in 401(k)-type plans and $7.2 trillion in IRAs (mostly rollovers). In 1981, says Craig Copeland, Senior Research Associate at the Employee Benefit Research Institute, there were “just” $4 billion in IRAs.

How did the IRA come to be?

History of the individual retirement account

The IRA, or individual retirement account was introduced by the Employee Retirement Income Security Act of 1974 (ERISA) as a way for American workers without an employer provided retirement plan to save for retirement. Taxpayers could contribute up to fifteen percent of their annual income or $1,500, whichever is less, each year and reduce their taxable income by the amount of their contributions. The contributions could be invested in a special United States bond paying six percent interest, annuities that begin paying upon reaching age 59½, or a trust maintained by a bank or an insurance company.