In 1981, after many forms of IRAs had been in use, Congress passed an IRA statute which made too much sense.  The law enacted at that time stated that any person with earned income could deposit up to $2000 annually into their IRA and deduct that amount on their tax return as an adjustment to income.  It was easy to understand, taxpayers knew that an IRA deposit would help their tax bill  and the date of the deposit  was optional.  The taxpayer’s level of income did not matter and it did not matter if you were also covered with a pension plan from your employer.  The deposit could be made anytime up to April 15 of the year following the year that the tax deduction.  Perhaps the best feature of all was that form of IRA provided an incentive to save.  This great tax feature stayed in effect for 5 years until 1986. 

 As stated above, this law made too much sense.  For many reasons, Congress started to tinker with this statute.  There were changes such as phase out rules pertaining to income levels, pension plan coverage by your employer, pension coverage by you spouses employer, if you were married.  There were numerous other rules which made IRAs difficult to understand and thus  caused taxpayers to loose interest. 


 TRADITIONAL IRAs – If you have earning, you may contribute to a traditional IRA up to an annual limit.  The annual limit is $5000 or $6000 if you are age 50 or older.  You must have at least that amount in earned income which can be wages, salary or net earnings from self employment.  The amount of your contribution is deductible on your 2012 tax return if neither you or your spouse are participants in an employer or self employed retirement plan.  There are also phaseout income thresholds.  For a single person, that phaseout threshold is $56,000 of modified adjusted gross income.  The phaseout threshold on a joint return is generally $90,000.  These thresholds vary if you are a participant in a retirement plan. 
 ROTH IRAs – As with traditional IRAs, earnings accumulate within a Roth IRA tax free until distributions are made.  The key benefit of the Roth IRA is that tax-free withdrawls of contributions may be made at any time and earnings may be withdrawn tax free after a five year holding period by and individual who is age 59 ½ or older, is disabled or who pays qualifying first time home-buyer expenses.                   
 A Roth IRA can provide attractive retirement planning and estate planning opportunities.  Although annual contributions to a traditional IRA are barred once you reach age 70 ½ contributions to a Roth IRA are allowed after age 70 ½, provided you have taxable compensation for the year and your modified adjusted gross income does not exceed the annual limitation.  Also, the minimum required distribution rules that apply to traditional IRAs after age 70 ½ do not apply to Roth IRAs.  Thus, a Roth IRA can remain intact after age 70 ½ and may continue to grow tax free.  The balance of the account not withdrawn during the owner’s lifetime generally may be paid out to the beneficiaries tax free over their life expectancies, thereby providing a substantial tax free buildup within the plan over an extended period. 
 In addition to making annual nondeductible contributions, a Roth IRA can be funded by converting a traditional IRA, SEP or SIMPLE IRA or rolling a distribution from an employer plan but the conversion or rollover to the Roth IRA is treated as a taxable transfer. 


 Even though IRA rules have become more complex, they are still a viable option for accumulating savings.  The complicated rules regarding the deductibility of IRA contributions have affected the mindset of taxpayers.  As said above, any taxpayer was guaranteed of tax savings with a contribution to an IRA.   Those days are long gone.  Today, many taxpayers have no idea if an IRA contribution would be deductible. 

 The unfortunate truth is that our leaders do not want any phase of our tax system to be simple.  The tax code is the chosen method for our elected officials to control our financial lives.  The changes that have made IRA rules very complex are the perfect example of this desire to control.