IRA, Why $2K? How the IRA Contribution Limit Got Stuck At $2,000

By Clifton Linton
Senior Writer, mPower

In This Story Congressional Dawdling Budget Highs and Lows Missed Opportunity Passage Prospects

The $2,000 contribution limit for IRAs has not budged in 19 years — since the first year Ronald Reagan was President. The reasons range from congressional politics to budget deficits. But, the House of Representatives recently passed legislation that would increase the limit to $5,000 by 2003.

It's about time, some retirement experts say. The delay has resulted in lost investment opportunities for Americans. It remains to be seen whether Congress will, at last, be able to move this increase off the back burner.

minute: read this article at a glance.

You'd think that in the hallowed halls of Congress, raising IRA contribution limits would be a no-brainer. What self-respecting legislator would vote against something that could potentially benefit all working American voters?

But, the limit has been stuck at $2,000 since 1981. There was no great conspiracy at work to prevent Americans from saving more — it was just a case of a lack of congressional will and money.

Consequently, many Americans have missed out on the opportunity to save more for their retirement.

Congressional Dawdling

When the IRA was created in 1974, it originally allowed Americans to set aside $1,500 a year. In 1981, Congress raised the annual contribution limit to $2,000 a year. And, that's where the limit has been stuck for 19 years. In 1999, Congress attached limit increases to a tax bill that was vetoed by President Clinton, for reasons unrelated to the retirement provisions. Now, Congress is trying again. The limit increases are part of a five-year, $15 billion package of private retirement reforms just passed by the House.

"That's great, it should be more," said Scott Leonard, certified financial planner and president of Leonard Capital Management in El Segundo, Calif. "If someone is willing to lock up the money for retirement, they should be able to put away as much as they want."

"The last time the IRA contribution limit was increased was when Ronald Reagan was president, in 1981. Had the IRA contribution limit been indexed to inflation, when they were first introduced in 1974, the contribution limit would already be more than $5,000." — Rep. Elton Gallegly, R-Calif.

Specifically, the legislation passed earlier in July proposes to boost the maximum annual IRA contribution limit to $3,000 in 2001. It would rise to $4,000 in 2002 and $5,000 in 2003, and be indexed to inflation thereafter.

Further, taxpayers age 50 and above would have the chance to make "catch-up" contributions of $5,000 a year, so they could boost their retirement nest eggs. And, there wouldn't be a phase-in for the catch-up contributions.

Budget Highs and Lows

Why has it taken Congress so long to get around to raising the contribution limits? The simple answer is: it depends on the budget.

House Ways and Means Committee Chairman Bill Archer, R-Texas, has supported increases for years, says Committee spokesman Trent Duffy.

Yet, there has been no action on IRAs since the 1981 legislation, says Theresa Turyn, of the Employee Benefit Research Institute.

"There have been proposals out there for years," said Duane Thompson, director of government relations with the Financial Planning Association, the trade group representing financial planners.

"I think part of the issue is like any that deals with federal funding ... how it impacts the budget," Thompson said.

And, that's the explanation House Ways and Means Committee spokesman Trent Duffy offered. In the 1980s and early 1990s, the federal government was running a deficit. So, Congress couldn't afford the missed tax revenue that would occur if contribution limits were raised.

With the government currently running a surplus, Congress, facing an election this year, is eager to give the money back to voters. Hence, lawmakers are ready to raise the contribution limits.

They plan to allow for periodic contribution limit increases by indexing the limit to inflation. Rep. Elton Gallegly, R-Calif., has been pushing for higher IRA contribution limits and tying them to an inflation measure.

"Had the IRA contribution limit been indexed to inflation, when they were first introduced in 1974, the contribution limit would already be more than $5,000," he said, in a statement.

Missed Opportunity

The fact that the level remained stagnant for so long means Americans have lost out on investment opportunities.

"It's not just the fact that you didn't have the additional dollars going in. It's the fact that those additional incremental dollars would have increased in value," said F. Dennis De Stefano, certified financial planner with De Stefano Wealth Management of Maui, Hawaii.

By not indexing the contribution limit to inflation, Congress in essence was reducing the value of the annual contribution, De Stefano added.

If, in 1981, the contribution limit had been indexed to inflation, a person investing the maximum at the beginning of each year would have a balance of $51,285 at the end of 1999, excluding any investment appreciation.

In comparison, under the existing rules, if you deposited the annual maximum of $2,000, in 19 years you would have a nest egg of $38,000, excluding any investment appreciation.

Passage Prospects

But, don't get your hopes up that you will be able to raise your IRA contributions any time soon. It's likely politics will get in the way of bringing a good idea to fruition, political observers say. This is an election year, and enmity between the parties and Congress and the White House is high.

A typical retiree gets 40 percent of his or her income from Social Security, 19 percent from employer-provided pensions, 20 percent from earnings, and 18 percent from personal savings such as IRAs, says the Social Security Administration.

Indeed, the new contribution limits are a part of a larger set of tax cuts and rebates that the Republican party is trying to pass before this summer's political conventions. The timing is key because President Clinton has vowed to veto most, if not all, of the tax packages. The GOP is banking on this, and plans to characterize the President and the Democrats as being against tax cuts and against returning a growing federal surplus to taxpayers.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

IRA, Why $2K? How the IRA Contribution Limit Got Stuck At $2,000

By Clifton Linton
Senior Writer, mPower

In This Story Congressional Dawdling Budget Highs and Lows Missed Opportunity Passage Prospects

The $2,000 contribution limit for IRAs has not budged in 19 years — since the first year Ronald Reagan was President. The reasons range from congressional politics to budget deficits. But, the House of Representatives recently passed legislation that would increase the limit to $5,000 by 2003.

It's about time, some retirement experts say. The delay has resulted in lost investment opportunities for Americans. It remains to be seen whether Congress will, at last, be able to move this increase off the back burner.

minute: read this article at a glance.

You'd think that in the hallowed halls of Congress, raising IRA contribution limits would be a no-brainer. What self-respecting legislator would vote against something that could potentially benefit all working American voters?

But, the limit has been stuck at $2,000 since 1981. There was no great conspiracy at work to prevent Americans from saving more — it was just a case of a lack of congressional will and money.

Consequently, many Americans have missed out on the opportunity to save more for their retirement.

Congressional Dawdling

When the IRA was created in 1974, it originally allowed Americans to set aside $1,500 a year. In 1981, Congress raised the annual contribution limit to $2,000 a year. And, that's where the limit has been stuck for 19 years. In 1999, Congress attached limit increases to a tax bill that was vetoed by President Clinton, for reasons unrelated to the retirement provisions. Now, Congress is trying again. The limit increases are part of a five-year, $15 billion package of private retirement reforms just passed by the House.

"That's great, it should be more," said Scott Leonard, certified financial planner and president of Leonard Capital Management in El Segundo, Calif. "If someone is willing to lock up the money for retirement, they should be able to put away as much as they want."

"The last time the IRA contribution limit was increased was when Ronald Reagan was president, in 1981. Had the IRA contribution limit been indexed to inflation, when they were first introduced in 1974, the contribution limit would already be more than $5,000." — Rep. Elton Gallegly, R-Calif.

Specifically, the legislation passed earlier in July proposes to boost the maximum annual IRA contribution limit to $3,000 in 2001. It would rise to $4,000 in 2002 and $5,000 in 2003, and be indexed to inflation thereafter.

Further, taxpayers age 50 and above would have the chance to make "catch-up" contributions of $5,000 a year, so they could boost their retirement nest eggs. And, there wouldn't be a phase-in for the catch-up contributions.

Budget Highs and Lows

Why has it taken Congress so long to get around to raising the contribution limits? The simple answer is: it depends on the budget.

House Ways and Means Committee Chairman Bill Archer, R-Texas, has supported increases for years, says Committee spokesman Trent Duffy.

Yet, there has been no action on IRAs since the 1981 legislation, says Theresa Turyn, of the Employee Benefit Research Institute.

"There have been proposals out there for years," said Duane Thompson, director of government relations with the Financial Planning Association, the trade group representing financial planners.

"I think part of the issue is like any that deals with federal funding ... how it impacts the budget," Thompson said.

And, that's the explanation House Ways and Means Committee spokesman Trent Duffy offered. In the 1980s and early 1990s, the federal government was running a deficit. So, Congress couldn't afford the missed tax revenue that would occur if contribution limits were raised.

With the government currently running a surplus, Congress, facing an election this year, is eager to give the money back to voters. Hence, lawmakers are ready to raise the contribution limits.

They plan to allow for periodic contribution limit increases by indexing the limit to inflation. Rep. Elton Gallegly, R-Calif., has been pushing for higher IRA contribution limits and tying them to an inflation measure.

"Had the IRA contribution limit been indexed to inflation, when they were first introduced in 1974, the contribution limit would already be more than $5,000," he said, in a statement.

Missed Opportunity

The fact that the level remained stagnant for so long means Americans have lost out on investment opportunities.

"It's not just the fact that you didn't have the additional dollars going in. It's the fact that those additional incremental dollars would have increased in value," said F. Dennis De Stefano, certified financial planner with De Stefano Wealth Management of Maui, Hawaii.

By not indexing the contribution limit to inflation, Congress in essence was reducing the value of the annual contribution, De Stefano added.

If, in 1981, the contribution limit had been indexed to inflation, a person investing the maximum at the beginning of each year would have a balance of $51,285 at the end of 1999, excluding any investment appreciation.

In comparison, under the existing rules, if you deposited the annual maximum of $2,000, in 19 years you would have a nest egg of $38,000, excluding any investment appreciation.

Passage Prospects

But, don't get your hopes up that you will be able to raise your IRA contributions any time soon. It's likely politics will get in the way of bringing a good idea to fruition, political observers say. This is an election year, and enmity between the parties and Congress and the White House is high.

A typical retiree gets 40 percent of his or her income from Social Security, 19 percent from employer-provided pensions, 20 percent from earnings, and 18 percent from personal savings such as IRAs, says the Social Security Administration.

Indeed, the new contribution limits are a part of a larger set of tax cuts and rebates that the Republican party is trying to pass before this summer's political conventions. The timing is key because President Clinton has vowed to veto most, if not all, of the tax packages. The GOP is banking on this, and plans to characterize the President and the Democrats as being against tax cuts and against returning a growing federal surplus to taxpayers.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.