Income in retirement comes from several sources. Most workers participate in the Social Security system, which pays retirement income as early as 62 years old. Retirement income security can also be provided by non-government sources, such as employer-sponsored pensions and participant-initiated retirement accounts. About half of the U.S. workforce participates in one or both of two kinds of employer-sponsored pensions. The two kinds of employer-sponsored pensions are defined benefit (DB) and defined contribution (DC) pensions. DB pensions provide retirees with monthly benefits in which the amount is calculated using a formula based on the number of years of employment and final salary. DC pensions, of which the 401(k) plan is the most common, provide participants individual accounts in which contributions from individual employees—and often their employers—are placed in tax-advantaged accounts that accrue investment returns. The accumulated contributions and investment earnings are then used for participants' retirement income. Although employers choose whether to offer DC plans, individual employees decide the contribution amounts (subject to an annual limit) and investment allocations of the contributions. Over the past 30 years, fewer employers have been providing DB plans and instead have offered DC plans. One consequence of this shift is that workers have had increasing responsibility for their retirement income security. Individual Retirement Accounts (IRAs) can play an important role by providing workers with tax-advantaged savings accounts in which to accumulate retirement savings. Although enrollment in a DC or DB plan is contingent on employer sponsorship of such a plan, most individuals (or married couples) who have taxable compensation can establish and contribute to an IRA. Similar to 401(k) plans, IRAs are tax-advantaged accounts in which contributions and investment earnings accumulate, which are then used for retirement income. Depending on the type of IRA, contributions may be made on a pre- or post-tax basis and investment earnings are either tax-deferred or tax-free. This report provides an overview and a brief legislative history of IRAs, examines the tax-deductible contributions to traditional IRAs in 2007, analyzes the characteristics of households that have IRAs, and compares IRA owners who have pension coverage at work with those who do not have pension coverage. The report concludes with a discussion of some of the policy proposals that some suggest might increase IRA ownership rates among American households. The two types of IRAs available to households in which either the head of the household or the spouse receives income from wages are traditional IRAs and Roth IRAs. Traditional and Roth IRAs differ in their eligibility requirements and the tax treatment of contributions and withdrawals. Individuals can also rollover lump-sum retirement assets from an employer-sponsored pension or an IRA into a rollover IRA. Rollover IRAs may be either traditional IRAs, in which investment earnings continue to accumulate tax-deferred, or Roth IRAs, in which investment earnings continue to accumulate tax-free. Individuals with taxable compensation who are under the age of 70½ can contribute to traditional IRAs. Traditional IRAs have at least two tax advantages over accounts that do not receive tax advantages: (1) the tax-deductibility of contributions allows individuals to have larger yearly contributions than otherwise would be the case; and (2) the earnings grow tax-deferred. In 2011, individuals may annually contribute the lesser of $5,000 or their taxable compensation to an IRA. Individuals aged 50 or older may make an additional $1,000 annual contribution. Contributions to traditional IRAs are tax-deductible (up to the maximum contribution) for individuals who (1) are not covered by an employer-sponsored pension plan or (2) are covered by an employer-sponsored pension plan but have income under statutory limits. In 2011, the phase out of the deduction begins at an Adjusted Gross Income (AGI) of $56,000 for single filers with pension coverage; at an AGI of $90,000 for married filers in which the head of the household has pension coverage; and at an AGI of $169,000 for married filers in which the head of the household does not have pension coverage but in which the spouse is covered by a pension plan. No deduction is allowed for AGI of $66,000 or more for single filers with pension coverage; $110,000 or more for married filers in which the head of the household has pension coverage; or $179,000 or more for married filers in which the head of the household does not have pension coverage but in which the spouse is covered by a pension plan. Withdrawals from traditional IRAs, except for that part of a withdrawal that represents after-tax contributions, must be included in account holders' taxable income. Congressional intent was that IRAs were to provide financial security in retirement and not be used for either pre-retirement expenses or as tax-free asset transfers to heirs. Most withdrawals from traditional IRAs before the account holder reaches the age of 59½ are subject to an additional 10% penalty tax, unless the reason for the withdrawal meets one of the exceptions found in 26 U.S.C. § 72(t). In addition, account holders older than the age of 70½ must receive Required Minimum Distributions (RMDs). RMDs are withdrawals of a specified percentage of the IRA balances each year. Roth IRAs were authorized by the Taxpayer Relief Act of 1997 ( P.L. 105-34 ). The key differences between traditional and Roth IRAs are that (1) contributions to Roth IRAs are not tax-deductible (thus the contributions are after-tax dollars) and (2) qualified distributions are not included in taxable income. The annual contribution limit to Roth IRAs is the lesser of $5,000 or the individual's taxable compensation. Individuals aged 50 or older may make an additional $1,000 annual contribution. Contributions to Roth IRAs are permitted only by individuals with incomes under prescribed statutory limits, currently at $120,000 for single filers and $177,000 for joint filers. Because qualified distributions are tax-free, Roth IRAs have no RMD requirement. Rollovers are transfers of assets from one retirement plan to another retirement plan, often upon separation from an employer. Generally, individuals may rollover account balances from employer-sponsored pension plans into traditional or Roth IRAs upon separation from employment. Individuals may also rollover traditional IRA account balances to Roth IRAs. Rollovers not completed within 60 days are considered taxable distributions. Rollovers are considered neither distributions nor contributions. The amount of the rollover is not included in taxable income, is not subject to the contribution limits, nor subject to rules that govern early distributions. Rollovers can come from traditional IRAs or from employers' pension plans. Prior to 2010, rollovers into Roth IRAs were limited to individuals with incomes under specified limits ; these income limits were eliminated beginning in 2010. IRAs were first authorized in 1974 by the Employee Retirement Income Security Act of 1974 (ERISA; P.L. 93-406 ) to encourage workers who did not have a pension plan at work to save for retirement. Prior to ERISA, Congress allowed self-employed individuals and their employees to make tax-deductible contributions to Keogh accounts for the purpose of providing for income in retirement. Some Keogh plan features, such as imposing penalties for withdrawing funds before the account owner reached the age of 59½ or for failing to take required withdrawals after the age of 70½, were incorporated into the design of IRAs. Table 1 lists the major IRA legislation since 1974 that has affected eligibility for and contributions to IRAs. From 1974 to 1981, only individuals who were not covered by an employer-sponsored pension plan could establish and contribute to IRAs. From 1982 to 1986, all workers regardless of pension coverage could make tax-deductible IRA contributions (up to the annual limit). Because of the revenue loss to the U.S. Treasury, the Tax Reform Act of 1986 ( P.L. 99-514 ) limited the tax deduction on IRA contributions to non-covered workers and to covered workers with incomes under $25,000. Since 1986, workers without pension coverage and workers with pension coverage and who have incomes under prescribed limits can make tax-deductible IRA contributions (up to the annual limit) while covered workers who have incomes greater than the prescribed limits may make non-deductible contributions. The annual contribution limit was set at $1,500 in 1974 and was increased to $2,000 in 1982. The limit was increased to $3,000 in 2002, $4,000 in 2005, and has been annually inflation-adjusted for increases in the Consumer Price Index (CPI) since 2008. The contribution limit for 2011 is $5,000. Beginning in 2002, individuals aged 50 and older could make an additional annual $500 "catch up" contribution to their IRAs. This was increased to $1,000 beginning in 2006. From 1982 to 1996, a non-working spouse could annually contribute $250 to an IRA. Since 1997, the contribution limit for non-working spouses has been equal to the contribution limit for working spouses. From 1974 to 1981, workers covered by a pension plan at work were prohibited from making IRA contributions. From 1982 to 1986, workers covered by an employer-sponsored pension plan could make tax-deductible contributions up to the annual limit of $2,000 to an IRA. Since 1987, workers covered by a pension plan may deduct 100% of their IRA contribution only if their incomes are under statutory limits. The percentage of the contribution that may be deducted is gradually reduced from 100% to 0% for incomes that are $10,000 or $20,000 (depending on filing status) greater than the statutory limits. No deduction is available for taxpayers with income greater than the upper limit of the phase-out range.