Retirement experts generally argue that there are three pillars to retirement income security: Social Security, employer-provided pensions, and private savings. Coverage by Social Security is nearly universal, but its benefits are limited, and many workers reach retirement with small pensions and little savings. Over the past few decades, Congress and the President have offered tax incentives to encourage businesses to offer pensions and workers to save. The Joint Committee on Taxation estimates that tax incentives to encourage retirement saving could cost the U.S. Treasury $714 billion between 2013 and 2017. An increasingly important retirement saving vehicle is the individual retirement account (IRA). IRAs were created by ERISA, the Employee Retirement Income Security Act of 1974 ( P.L. 93 - 406 ), which was signed into law by President Ford on Labor Day. ERISA was passed to protect the interests of pension plan participants and pension beneficiaries. IRAs were originally designed to give individuals not covered by an employer pension plan a chance to save in a tax advantaged retirement account. Since ERISA was passed in 1974, the law has been amended several times to change the tax treatment of IRAs and create new types of IRAs. Currently, nearly everyone is eligible to contribute to at least one type of IRA. IRA savings is encouraged by two mechanisms—a carrot and a stick approach. First, tax provisions allow individuals to defer taxes on IRA contributions and investment earnings or to accumulate investment earnings tax free, effectively raising the rate of return on IRA contributions. Second, nonqualified withdrawals before the age of 59½ are subject to a 10% penalty tax in addition to regular taxes. Several times during his Administration, President Bush had proposed that all IRAs be combined into a single Roth-style IRA. The Obama Administration appears to be taking a different tack by proposing additional incentives to saving in existing retirement saving accounts that have proven effective in evaluations. This report provides background information on IRAs, including a description of current law and the tax benefits of IRAs. In addition, the effects of IRAs on saving and other national objectives are discussed. A final section describes and analyzes recent IRA reform proposals. The Appendix contains a history of the development of IRAs. Although IRAs have been around for over 30 years, the rules regarding IRAs have changed several times (see the Appendix for a brief history of IRAs). The current rules were set in the Economic Growth and Tax Relief Reconciliation Act of 2001 ( P.L. 107 - 16 ). For 2013, both the traditional and Roth IRAs have an annual contribution limit of $5,500, which is adjusted to inflation (in $500 blocks). Individuals 50 years or older may make additional annual "catch-up" contributions of $1,000. The provisions of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) would have expired after 2010, but the Pension Protection Act of 2006 made the pension and IRA provisions of EGTRRA permanent. Contributions to traditional IRAs by certain individuals are tax deductible. The amount of the deduction depends on the level of the individual's modified adjusted gross income (AGI) and whether the individual or the individual's spouse is covered by an employer pension plan. Table 1 shows the income limits for the deductibility of contributions. Generally, individuals not covered by an employer pension plan and lower-income individuals are entitled to at least a partial deduction. Single individuals with modified AGI of less than $59,000 are entitled to a full deduction even if they are covered by an employer pension plan. Married individuals filing jointly and not covered by an employer pension plan but whose spouses are covered by a pension plan are entitled to deduct part of their traditional IRA contribution if their modified AGI is between $178,000 and $188,000. The Tax Increase Prevention and Reconciliation Act of 2005 ( P.L. 109 - 222 ), which became law in May of 2006, allows high-income individuals to convert any of their IRAs to Roth IRAs beginning in 2010, so that their partially tax-favored plans become fully tax exempt. Taxes on the conversions occurring in 2010 were due in 2011 and 2012. Whether or not contributions are deductible, investment earnings on traditional IRA assets are tax deferred until distribution at retirement. Taxable distributions from traditional IRAs are taxed as ordinary income. All deductible contributions to traditional IRAs are fully taxable when withdrawn. However, nondeductible or after-tax contributions are not taxed when withdrawn; only the investment earnings on these contributions are taxable. Taxable distributions from traditional IRAs made before the individual has reached 59½ years of age are subject to an additional 10% penalty tax. Contributions to Roth IRAs are not tax deductible, but qualified distributions from Roth IRAs are tax free. Not everyone, however, is eligible to contribute to a Roth IRA—there are income limits on participation (see Table 2 ). At a certain income level (for example, $110,000 for a single individual), the contribution limit is reduced. The contribution limit is eventually reduced to zero, and the individual is not eligible to contribute to a Roth IRA. Although qualified distributions from Roth IRAs are tax free, early distributions may be subject to a 10% penalty tax in addition to regular taxes. Owners of traditional IRAs are required to begin taking minimum distributions from their IRA beginning at 70½ years old (Roth IRA owners face no such requirement). The rules applying to the required minimum distribution are the same as those for qualified employer-sponsored retirement plans (e.g., 401(k)s). The individual must receive the distribution by April 1 following the calendar year in which the owner reaches the age of 70½. The amount that is required to be distributed depends on the IRA balance at the end of the preceding year and life expectancy. For example, an unmarried 71-year-old with an IRA balance of $26,500 would be required to take a minimum distribution of $1,000. With the precipitous decline in the stock market in 2008, Congress was concerned that many elderly retirees would be disadvantaged because they would be required to withdraw retirement monies by selling stocks when the market is down. Furthermore, basing the distribution amount on the account balance as of the end of the previous year could mean that the distribution is a larger proportion of the actual balance at the time of the distribution. Consequently, Congress passed the Worker, Retiree, and Employer Recovery Act of 2008 ( P.L. 110-458 ), which provided for a one-year waiver of the required minimum distribution rules for calendar year 2009. The minimum distribution rules, however, only require that IRA owners move a certain proportion of their IRA balance from a tax-advantaged investment account to a taxable investment account and pay the appropriate taxes on the distribution (which had been deferred). Moreover, because the market will presumably recover, paying taxes at a time when asset values are low could be beneficial compared with normal circumstances, because it will defer taxes to the future when asset values rise. The main tax advantages of a traditional IRA are the deductibility of contributions for some individuals and the tax deferment of investment returns on IRA assets. The advantages are due to (1) tax-deferred compounding of interest, and (2) the possibility of postponing tax liability from a time when income is high and the individual is in a high tax bracket, to a time when income may be lower and the individual is in a lower tax bracket. However, there is no guarantee that income will be lower after retirement than before, or that the tax brackets will be the same after retirement as before. Contributions to a Roth IRA are taxable, but the returns earned on Roth IRA assets are not taxable. Consequently, in this important respect, Roth IRAs are like a tax-exempt bond. Very-high-income individuals and families, however, are not eligible to establish and contribute to a Roth IRA. Losses on both traditional and Roth IRA investments can be included on an individual's tax return. The loss, however, can only be included if the individual itemizes, and after all the amounts in the IRA have been distributed with the total distributions being less than total nondeductible contributions. The ultimate tax treatment of a front-loaded deductible traditional IRA and a back-loaded Roth IRA can be equivalent under certain circumstances. Assuming that tax rates are the same at the time of contribution and withdrawal, a deductible traditional (front-loaded) IRA offers the equivalent of no tax on the return to savings, just like a Roth (back-loaded) IRA. The initial tax benefit from the deduction is offset, in present value terms, by the payment of taxes on withdrawal. Here is an illustration: Suppose an individual had earned $100 before taxes to invest in an IRA and faces a tax rate of 25%. With a deductible traditional IRA, the individual could invest the $100, earn a 10% return, and have $110 after one year. At a 25% tax rate, the individual would receive an $82.50 after-tax distribution from his or her IRA. If the individual instead chose a Roth IRA, he or she would first pay taxes on the $100 (equal to $25) and contribute $75 to the Roth IRA. After one year and a 10% return on investment, the individual would receive an $82.50 distribution from his or her Roth IRA ($75 in principal and a $7.50 return on investment, neither of which would be taxed). In this example, the after-tax distributions from each type of IRA are the same. There are three ways in which these tax treatments can differ: if tax rates vary over time, if the dollar ceilings are the same, and if premature withdrawals are made. There are also differences in the timing of tax benefits that have some implications for individual behavior as well as revenue costs.