Understanding IRAs and Retirement Plans / Tax-Saving Strategies

History of IRAs:

Employee Retirement Income Security Act of 1974 (ERISA):

  • Federal law establishing standards for private pension plans.
  • Did not require employers to have pension plans, but enforces rules for those that do.
  • Studebaker went out of business in the late ‘60s and couldn’t pay their employee pensions because they weren’t funded adequately.
  • Taxpayers could contribute up to $1,500 per year and reduce taxable income by the amount of the contributions.

Economic Recovery Tax Act 1981 (ERTA):

  • Under ERISA, IRAs were restricted to those workers who were not already covered by a qualified employment-based retirement plan.
  • Under ERTA, all taxpayers who were age 70½ or younger could contribute to an IRA.
  • Taxpayers could contribute up to $2,000 to their own IRA and $250 for a nonworking spouse and receive a tax deduction.
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