The individual retirement account (IRA) has been around for nearly half a century, a testament to its incredible popularity among American workers. But over that time, these tax-advantaged accounts have undergone significant changes in terms of who is eligible to use them and how much owners can contribute.
We’ll take a look at how those contribution limits have evolved over the years, and how today’s cap compares to previous periods in the IRA’s history when accounting for inflation.
- When the individual retirement account (IRA) was created in 1974, the contribution limit per year was $1,500; it has since climbed to $6,000 for those under age 50 for 2022, and to $6,500 for 2023.
- A 2001 law pegged the contribution limit to inflation, ensuring that the ceiling would keep pace with an increased cost of living.
- The annual limit applies to one’s total IRA contributions, if you own more than one IRA.
Understanding IRA Contribution Limits
When Congress passed the Employee Retirement Income Security Act of 1974—more commonly known as ERISA—the landmark legislation created a new type of retirement account geared specifically toward taxpayers without an employer-provided pension.
With these new IRAs, workers could set aside up to $1,500 per year—or up to 15% of their income, if it was less—into the account. Their contributions would not be subject to income tax, although distributions made in retirement would. The contribution amount increased to $2,000 in 1982.
In subsequent years, the IRA experienced some key changes. For example, the Tax Reform Act of 1986 phased out the deductibility of contributions for those with higher incomes or with workplace retirement benefits.
The Taxpayer Relief Act of 1997 created a new version of the account, called the Roth IRA, where workers contributed after-tax dollars but could withdraw tax-free funds in retirement. The Roth variant was particularly appealing to younger workers and other investors who anticipated being in a higher tax bracket when they retired. Since Roth IRAs were launched, they have had the same contribution limits as traditional IRAs.
As of 2021, roughly 37% of U.S. households owned an IRA, with total assets of $13.2 trillion, according to the Investment Company Institute. The think tank estimates that these accounts comprise 35% of total retirement assets in the United States, up from 23% two decades before.
Of course, the IRA contribution limit has changed considerably over the years. In 2022, investors can put in up to $6,000 per year, or $7,000 if they’re age 50 or older and qualify for the catch-up contribution. For 2023, the limits increase to $6,500 and $7,500 respectively. However, the amount that you contribute cannot exceed your annual compensation, if it’s less than these limits.
While it’s possible to own multiple IRAs—even contributing to traditional and Roth versions simultaneously—the annual limit applies to one’s cumulative IRA contributions. In other words, if in 2022 you contribute $2,000 to one IRA, you can only put up to $4,000 into your other IRAs ($5,000 if you’re age 50 or older).
Excess contributions are subject to a 6% tax per year, which applies to the amount above the limit. However, retirement assets rolled over from a workplace plan or another IRA do not count toward the contribution limit.
The IRA goes back nearly a half-century, but it wasn’t pegged to inflation until 2001. Because it took legislation to increase the limit before then, the ceiling was only increased once from 1974 to 2001.
Timeline of IRA Contribution Limits
When the IRA was created in 1974, contribution limits weren’t pegged to inflation. It took an act of Congress to alter the amount that Americans were able to put in. In fact, it wasn’t until the Economic Recovery Tax Act of 1981 that the cap was increased for the first time, bringing the limit up to $2,000 from $1,500.
For two decades, 1982 through 2001, that amount remained unchanged. It wasn’t until the Economic Growth and Tax Relief Reconciliation Act of 2001 that the IRA contribution limit was temporarily indexed to inflation (it took effect the following year). The 2001 law also created a catch-up provision that allowed savers ages 50 and older to contribute an additional $500 per year. A 2006 law made that indexing permanent.
Because of the lack of inflation adjustment early on, the contribution limit as a percentage of median income fluctuated significantly during the first 27 years of the IRA’s existence. For instance, in 1982, the contribution limit of $2,000 represented 9.9% of what a typical household earned ($20,171). But by 2001—the last year before that cap was raised—that $2,000 cap correlated to just 4.7% of the median U.S. household income.
Since inflation indexing took effect in 2002, the relationship between contribution limits and income has largely—if not completely—stabilized. For one, the government uses cost-of-living figures, not income, when adjusting IRA limits. Furthermore, there’s a lag between adjustments to the cost of living and when IRA limits are announced for a given tax year.
In 2010, for example, IRA owners faced a $5,000 limit on contributions, or 10.1% of median household earnings.
By 2022, the limit had increased to $6,000 for those under age 50, which represented 8.9% of median household earnings, according to census figures.
Is the Individual Retirement Account (IRA) Contribution Limit Adjusted for Inflation?
The individual retirement account (IRA) contribution limit has been pegged to cost-of-living changes since 2001. Prior to that, it took legislation to increase the contribution limit, which happened only once from 1974 to 2001.
What Is the IRA Catch-Up Provision?
The IRA catch-up provision allows individuals ages 50 and older to contribute an additional amount above the standard contribution limit. For 2022, those older Americans can contribute up to $7,000 through their IRAs, vs. $6,000 for individuals under age 50. For 2023, the contribution limit for those aged 50 and over is $7,500, vs. $6,500 for individuals under 50.
Can You Invest Up to the Contribution Limit in Multiple IRAs?
The Internal Revenue Service (IRS) contribution limit applies to all of one’s IRAs—traditional and Roth. If in 2022 you contribute $6,000 to one IRA, you may not contribute an additional $6,000 to another IRA.
The Bottom Line
The fact that IRA contribution limits are now pegged to inflation is good news for the millions of Americans who own these accounts. Before that inflation indexing occurred, the limit dropped substantially as a percentage of median income, until Congress would come in with legislation to raise the ceiling.