Introduction

Individual Retirement Accounts (IRAs) are tax-advantaged accounts that individuals (or married couples) can establish to accumulate funds for retirement. Depending on the type of IRA, contributions may be made on a pretax or post-tax basis, and investment earnings are either tax-deferred or tax-free.¹ In addition, workers can roll over savings from employer-sponsored retirement savings plans into IRAs to preserve their savings' tax advantages.

IRAs were first authorized by the Employee Retirement Income Security Act of 1974 (ERISA; P.L. 93-406). IRAs were originally limited to workers without pension coverage, but the Economic Recovery Act of 1981 (P.L. 97-34) made all workers and spouses eligible for IRAs. The Tax Reform Act of 1986 (P.L. 99-514) limited the eligibility for tax-deductible contributions to individuals whose employers do not sponsor plans and to those whose employers sponsor plans but who have earnings below specified thresholds. The Taxpayer Relief Act of 1997 (P.L. 105-34) allowed for penalty-free withdrawals for qualified higher education expenses and authorized the Roth IRA, which provides tax-free growth from after-tax contributions.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) significantly affected the contribution limits in these plans in three ways: it (1) increased the limits, (2) indexed the limits to inflation, and (3) allowed for individuals aged 50 and older to make additional "catch-up" contributions. Among other provisions, the Pension Protection Act of 2006 (PPA; P.L. 109-280) made permanent the indexing of contribution limits to inflation, allowed taxpayers to direct the Internal Revenue Service (IRS) to deposit tax refunds directly into an IRA, and temporarily allowed for certain tax-free distributions for charitable contributions (which was later made permanent by P.L. 114-113).²

The Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) temporarily authorized penalty-free IRA (or other retirement plan) distributions of up to $100,000 for qualified individuals affected by Hurricane Katrina. Since then, various laws have provided similar relief for other federally declared disasters (see Appendix).

The Setting Every Community up for Retirement Enhancement Act of 2019 (SECURE Act), enacted as Division O of the Further Consolidated Appropriations Act, 2020 (P.L. 116-94), included multiple provisions related to IRAs. The SECURE Act

• repealed the maximum age at which individuals can contribute to traditional IRAs;
• increased the age at which required minimum distributions (RMDs) from traditional IRAs must begin;
• treated certain nontuition fellowship and stipend payments as compensation for IRA contribution purposes;
• treated tax-exempt "difficulty of care" payments to home healthcare providers as compensation for nondeductible IRA contribution limit purposes;
• allowed penalty-free early withdrawals for qualifying birth and adoption purposes; and
• modified distribution rules for inherited IRAs.

This report describes the two types of IRAs that individual workers can establish: traditional IRAs and Roth IRAs.³ It describes the rules regarding eligibility, contributions, and withdrawals. It also describes a tax credit for retirement savings contributions. An Appendix describes the relief provided to those affected by certain federally declared disasters, starting with the Gulf of Mexico hurricanes in 2005.

Traditional and Roth IRAs

Traditional IRAs are funded by workers' contributions, which may be tax deductible (depending on the IRA owner's household income and workplace pension coverage). The contributions may accrue investment earnings in an account, and these earnings can be used as a source of income in retirement. Taxes are paid on both contributions and any interest earnings when funds are distributed. Because income tax rates in retirement are often lower than during working life, traditional IRA holders are likely to pay less in taxes when contributions are withdrawn than when the income was earned.

Roth IRAs were authorized by the Taxpayer Relief Act of 1997 (P.L. 105-34). One key difference between traditional and Roth IRAs is that contributions to Roth IRAs are made with after-tax funds and qualified distributions are not included in taxable income; investment earnings accrue free of taxes.⁴

For both traditional and Roth IRAs, funds are typically taxed only once—at either the time of contribution (in the case of Roth IRAs) or the time of withdrawal (in the case of traditional IRAs). This concept underlies many of the differences between traditional and Roth IRAs that follow throughout this report (for example, why traditional IRAs are subject to annual withdrawals in retirement while Roth IRAs are not).⁵

Contributions to IRA can be made from taxable and certain nontaxable compensation. Examples of compensation include wages, salaries, tips, commissions, self-employment income, nontaxable combat pay, and alimony (which is treated as compensation for IRA purposes).⁶ Compensation also includes nontuition fellowship and stipend payments (i.e., payments to individuals that are used in the pursuit of graduate or postdoctoral study).⁷

Because IRAs were intended for workers without employer-sponsored pensions to save for retirement, contributions to an IRA may come only from compensation, as listed above. The following noncompensation sources of income cannot be used for IRA contributions:

• earnings from property, interest, or dividends,
• pension or annuity income,
• deferred compensation,
• income from partnerships for which an individual does not provide services that are a material income-producing factor, and
• foreign earned income.

IRAs can be set up through many financial institutions, such as banks, credit unions, mutual funds, life insurance companies, or stock brokerages. These financial institutions offer an array of investment choices. Individuals can transfer their accounts from one financial institution to another at will.

Several transactions could result in additional taxes or the loss of IRA status. These transactions include borrowing from IRAs; using IRAs as collateral for loans; selling property to IRAs; and investing in collectibles such as artwork, antiques, metals, gems, stamps, alcoholic beverages, and most coins.⁸

Equivalence of Traditional and Roth IRAs

Under certain assumptions, traditional and Roth IRAs provide individuals with identical amounts to spend in retirement. These assumptions include (1) identical tax rates at the time of contribution and withdrawal and (2) equal investment growth in the traditional and Roth accounts.

Stylized examples may help illustrate this concept. An individual who has $100 in pre-tax income and faces a 25% tax rate could contribute $75 to a Roth IRA. Assume the investment doubles in value to $150. In retirement, the qualified withdrawal would not be included in taxable income. The individual would receive $75 plus $75 in investment earnings, or $150.

Alternatively, the same individual could contribute $100 to a deductible traditional IRA.⁹ Assume the investment doubles in value to $200. In retirement, the distribution would be taxed at a 25% tax rate. The individual owes taxes of $50 (25% of the $100 contribution plus 25% of the investment earnings). The individual would receive $75 plus $75 in investment earnings, or $150.

Note that because an individual's income tax rate in retirement is likely to be different than his or her tax rate while working, in practice, traditional and Roth IRAs would probably not provide equal amounts in retirement.

IRA Tax Benefits

Traditional IRA tax benefits are structured as tax deferrals rather than tax deductions. A tax deduction refers to a one-time reduction in taxable income. A deferral means that tax liability is postponed to some point in the future, so even if an individual deducts contributions, the individual must pay taxes on these contributions (and any earnings) at withdrawal. This implies that the tax benefit of IRAs is not the up-front deduction but rather the difference between the after-tax investment gains resulting from an IRA versus a taxable account. As described in the previous section, traditional IRA tax deferral is equivalent to Roth IRA treatment under certain assumptions. It follows that the tax benefit is also the same.

The benefit of contributing to an IRA rather than a taxable account (e.g., a mutual fund) for an individual eligible to contribute to a traditional or Roth IRA depends on several factors. These include the rate of return on investments, the type of investment income (e.g., capital gains versus dividends), and the time period over which investment earnings accrue.¹⁰

This tax benefit is often described as an effectively tax-free rate of return on investment earnings and applies to both traditional and Roth IRAs.¹¹

Continuing with the equivalence example from above, instead of contributing to an IRA, the same individual could contribute to a taxable account. Because contributions to taxable accounts are not deductible, the individual could put $75 into the account. The $75 would accrue investment earnings, and—depending on the type—these earnings would be taxed annually (in the case of dividends) or when the investment is sold (capital gains).¹² If investment earnings in the taxable account accrue at the same rate as those in the traditional and Roth IRA example described earlier, and the individual faces a 25% tax rate on these earnings annually, the individual would receive less in after-tax withdrawals when contributing to a taxable account compared to an IRA.

In practice, traditional and Roth IRA owners may receive an additional benefit if tax rates are different at the time of contribution and withdrawal.¹³

Eligibility to Contribute and Contribution Limits

Eligibility to make contributions differs between traditional and Roth IRAs and is based on household income. Eligible individuals may contribute either their gross compensation or the contribution limit, whichever is lower. In 2022, the annual contribution limit is $6,000.¹⁴ Since 2009, the contribution limit has been subject to cost-of-living adjustments.¹⁵ Individuals aged 50 and older may make additional annual $1,000 catch-up contributions. For households that file a joint return, spouses may contribute an amount equal to the couple's total compensation (reduced by the spouse's IRA contributions) or the contribution limit ($6,000 each, if younger than the age of 50, and $7,000 each, if aged 50 and older), whichever is lower. Contributions that exceed the contribution limit and are not withdrawn by the due date for that year's tax return are considered excess contributions and are subject to a 6% "excess contribution" tax. Contributions made between January 1 and April 15 may be designated for either the current year or the previous year.

Traditional IRAs. Any individuals who receive taxable (and certain nontaxable) compensation can set up and contribute to traditional IRAs.¹⁶

Roth IRAs. In contrast to traditional IRAs, Roth IRAs have income limits for eligibility. Table 1 lists the modified AGIs at which individuals may make the maximum contribution and the ranges in which this contribution limit is reduced.¹⁷ For example, a 40-year-old single taxpayer with income of $90,000 may contribute $6,000 in 2022. A similar taxpayer making $130,000 would be subject to a reduced contribution limit, whereas a taxpayer with income of $145,000 would be ineligible to contribute to a Roth IRA.

Deductibility of Traditional IRA Contributions

Traditional IRA contributions may be non-tax-deductible, partially tax-deductible, or fully tax-deductible, depending on whether the individual or spouse is covered by a pension plan at work and their level of adjusted gross income (AGI).¹⁸ Roth IRA contributions are not deductible.

Individuals are covered by a retirement plan if (1) the individuals or their employers have made contributions to a defined contribution pension plan or (2) the individuals are eligible for a defined benefit pension plan (even if they refuse participation).

For individuals and households not covered by a retirement plan at work, Table 2 outlines the income levels at which they may deduct all, some, or none of their traditional IRA contributions, depending on the spouse's pension coverage and the household's AGI. Individuals without employer-sponsored pensions and, if married, whose spouse also does not have pension coverage, may deduct up to the contribution limit from their income taxes regardless of their AGI.

For individuals and households who are covered by a retirement plan at work, Table 3 outlines the income levels at which they may deduct all, some, or none of their IRA contributions, depending on the individual's or household's AGI.

Individuals may still contribute to IRAs up to the contribution limit even if the contribution is nondeductible.¹⁹ Nondeductible contributions come from post-tax income, not pretax income. One advantage to placing post-tax income in traditional IRAs is that any investment earnings on nondeductible contributions are not taxed until distributed.

Contributions greater than the contribution limits are considered excess contributions. Worksheets for computing partial deductions are included in "IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)."²⁰

Withdrawals

Withdrawals from IRAs can be made for any reason, unlike those from defined contribution plans, such as a 401(k) plan. Withdrawal rules depend on whether the withdrawal comes from a traditional or Roth IRA.

In addition to any taxes owed, some IRA distributions may be subject to a 10% penalty, such as early distributions from traditional IRAs and nonqualified distributions from Roth IRAs.

Traditional IRA Withdrawal Rules

Withdrawals of deductible contributions and any investment earnings from traditional IRAs are subject to income tax in the year that they are received. Withdrawals of any earnings attributable to nondeductible contributions are subject to income tax in the year that they are received.

Early distributions. Early distributions are withdrawals made before the age of 59½ and are subject to an additional 10% penalty unless an exception applies (e.g., death, disability, qualified birth or adoption expense; see "Exceptions to 10% Penalty" section later in this report).

Regular withdrawals. Withdrawals may be made penalty free after the IRA owner reaches age 59½.

Required distributions. To ensure that IRAs are used for retirement income and not for bequests, traditional IRA holders must begin making withdrawals by April 1 of the year after reaching the age of 72 (i.e., the required beginning date).²¹ The minimum amount that must be withdrawn (i.e., the required minimum distribution, or RMD) for each year is calculated by dividing the account balance on December 31 of the year preceding the distribution by the IRA owner's life expectancy as found in IRS Publication 590-B.²² Although females live longer on average than males, the IRS does not separate life expectancy tables for males and females for this purpose.²³ RMDs must be received by December 31 of each year. Failure to take the RMD results in a 50% excise tax on the amount that was required to have been distributed. Congress suspended the RMD for 2009 and 2020.²⁴

Roth IRA Withdrawal Rules

The three types of Roth IRA distributions are (1) returns of regular contributions, (2) qualified distributions, and (3) nonqualified distributions. Returns of regular contributions and qualified distributions are not included as part of taxable income.

Return of Regular Contributions. Roth IRA distributions that are a return of regular contributions, which are withdrawals of original contributions, are neither included in taxable income nor subject to the 10% penalty.

Qualified Distributions. Qualified distributions, which include earnings on contributions, must satisfy both of the following:

• they are made after the five-year period beginning with the first taxable year for which a Roth IRA contribution was made, and
• they are made on or after the age of 59½; because of disability; to a beneficiary or estate after death; or to purchase, build, or rebuild a first home up to a $10,000 lifetime limit.²⁵

Nonqualified Distributions. Distributions that are neither returns of regular contributions nor qualified distributions are considered nonqualified distributions. A 10% penalty applies to nonqualified distributions unless the account holder meets one of the exceptions in Title 26, Section 72(t), of the U.S. Code or a temporary exception due to a federally declared disaster (see "Exceptions to 10% Penalty" section below).

Although individuals might have several Roth IRAs from which withdrawals can be made, for tax purposes nonqualified distributions are assumed to be made in the following order:

• 1. the return of regular contributions,
• 2. conversion contributions on a first-in-first-out basis,²⁶ and
• 3. earnings on contributions.

The taxable portion of any nonqualified distribution (e.g., earnings on contributions) may be included in taxable income. A worksheet is available in IRS Publication 590-B to determine the taxable portion of nonqualified distributions.

Roth IRA owners do not have to take RMDs (though individuals who inherit Roth IRAs may be required to take them).

Beginning in 2007, distributions from traditional or Roth IRAs after the age of 70½ could be made directly to qualified charities and excluded from gross income. This provision for Qualified Charitable Distributions was made permanent in P.L. 114-113.²⁷

Exceptions to 10% Penalty

To discourage the use of IRA funds for preretirement uses, early distributions from traditional IRAs and nonqualified distributions from Roth IRAs are subject to federal income tax and an additional 10% tax penalty unless an exception applies.²⁸ The early withdrawal penalty does not apply if the IRA owner is younger than age 59½ and the distributions

• occur if the individual is a beneficiary of a deceased IRA owner;
• occur if the individual is disabled;
• are in substantially equal payments over the account holder's life expectancy;
• are received after separation from employment after the age of 55;
• are for unreimbursed medical expenses in excess of 7.5% of AGI (10% if under age 65);
• are for medical insurance premiums in the case of unemployment;
• are used for higher education expenses;²⁹
• are used to build, buy, or rebuild a first home up to a $10,000 withdrawal limit;
• are used for expenses related to the qualified birth or adoption of a child (up to a $5,000 withdrawal limit taken within one year following the event);³⁰ or
• occur if the individual is a reservist called to active duty after September 11, 2001.

In response to various federally declared disasters and the Coronavirus Disease 2019 (COVID-19) pandemic, Congress has temporarily exempted distributions to those affected from the 10% early withdrawal penalty. For example, in response to COVID-19, Congress permitted qualified individuals to take penalty-free distributions of up to $100,000 from retirement accounts from January 1, 2020, and before December 31, 2020 (P.L. 116-136). Details of these various relief provisions are provided in the Appendix.

Although early withdrawals from IRAs are permitted without reason, individuals will be subject to the 10% tax penalty unless they meet one of the conditions above. There are no other general "hardship" exceptions for penalty-free distributions from IRAs.

Rollovers

Rollovers are transfers of assets from one retirement plan to another upon separation of the worker from the original employer. Rollovers are not subject to the 59½ rule, the 10% penalty, or the contribution limit.

• Rollovers to traditional IRAs can come from other traditional IRAs, employers' qualified retirement plans (e.g., 401(k) plans), deferred compensation plans of state or local governments (Section 457 plans), tax-sheltered annuities (Section 403(b) plans), or the Thrift Savings Plan (TSP) for federal employees.
• Rollovers to Roth IRAs can come from other Roth IRAs, traditional IRAs, employers' qualified retirement plans (e.g., 401(k) plans)—including from designated Roth accounts within qualified plans, deferred compensation plans of state or local governments (Section 457 plans), tax-sheltered annuities (Section 403(b) plans), or the TSP for federal employees. Rollovers from a pre-tax account (such as a traditional IRA) to a Roth IRA are referred to conversions (described in more detail below).
• Rollovers from Roth IRAs to traditional IRAs or to employer-sponsored retirement plans are not allowed.³¹ Similarly, rollovers from designated Roth accounts in qualified plans to traditional IRAs are not allowed.

Rollovers can be either direct trustee-to-trustee transfers or issued directly to individuals who then deposit the rollovers into traditional IRAs.³² In the latter case, individuals have 60 days from the date of the distribution to make rollover contributions. Rollovers not completed within 60 days are considered taxable distributions and may be subject to the 10% early withdrawal penalty. In addition, in cases where individuals directly receive a rollover, 20% of the rollover is withheld for tax purposes and individuals must have an amount equal to the 20% withheld available from other sources to place in the new IRA. If the entire distribution is rolled over within 60 days, the amount withheld is applied to individuals' income taxes paid for the year. Direct trustee-to-trustee transfers are not subject to withholding taxes.

Certain Rollovers Limited to One per Year

A January 2014 U.S. Tax Court decision required that, in certain circumstances, individuals are limited to a total of one rollover per year for their IRAs.³³ Rollovers subject to this rule are those between two IRAs in which an individual receives funds from an IRA and deposits the funds into a different IRA within 60 days. The one-rollover-per-year limit applies to rollovers between two traditional IRAs or two Roth IRAs. It does not apply to rollovers from a traditional IRA to a Roth IRA (i.e., a conversion). The limitation does not apply to trustee-to-trustee transfers (directly from one financial institution to another) or rollovers from qualified pension plans (such as from 401(k) plans).

Conversions to Roth IRAs

Individuals may convert amounts from traditional IRAs, SEP-IRAs, or SIMPLE-IRAs to Roth IRAs.³⁴ Since 2008, individuals have been able to roll over distributions directly from qualified retirement plans to Roth IRAs. Individuals may want to roll over funds from qualified plans to Roth IRAs for various reasons, such as greater withdrawal flexibility or more investment options. In addition, in certain cases, it may be advantageous from a tax perspective (for example, an individual might convert amounts during a year in which he or she faces low tax rates).

The amount of the conversion must be included in taxable income. Conversions can be a trustee-to-trustee transfer, a same-trustee transfer by redesignating the IRA as a Roth IRA, or a rollover directly to the account holder. Inherited IRAs cannot be converted.

Contributions (not rollovers or conversions) made to a traditional or Roth IRA can be recharacterized as having been made to the other type of IRA. However, conversions and rollovers to a Roth IRA made during or after 2018 cannot be recharacterized to a traditional IRA.³⁵

Rollover rules that apply to traditional IRAs, including completing a rollover within 60 days, also apply to Roth IRAs. In addition, withdrawals from a converted IRA prior to five years from the beginning of the year of conversion are nonqualified distributions and are subject to a 10% penalty (see "Nonqualified Distributions" earlier in this report).

Individuals who are ineligible to contribute to Roth IRAs due to income limits may be able to fund Roth IRAs through what is informally referred to as a backdoor Roth IRA. In this case, individuals may make contributions to traditional IRAs (typically nondeductible contributions, due to income thresholds for deductibility) and then convert their traditional IRA funds to Roth IRA funds.³⁶

Inherited IRAs

When the owner of an IRA dies, ownership passes to the account's designated beneficiary or, if no beneficiary has been named, to the decedent's estate. Section 401 of the SECURE Act (Division O of P.L. 116-94) modified distribution rules for designated beneficiaries of account owners who die after December 31, 2019. The following distribution rules apply to these accounts. Federal law has different distribution requirements depending on whether the new owner is a

• designated spouse beneficiary,
• designated nonspouse beneficiary,
• eligible designated beneficiary, or
• nondesignated or estate beneficiary.

Some distribution rules depend on whether the IRA owner died prior to the required beginning date, which is the date on which distributions from the account must begin. This is April 1 of the year following the year in which the IRA owner reaches the age of 72.

The Roth IRA's original owner does not have to take an RMD (and therefore, has no required beginning date). Following the initial account owner's death, the Roth IRA beneficiary must take an RMD using the same rules that apply to traditional IRAs as if the account owner had died before the required beginning date.

Designated Spouse Beneficiaries

A designated spouse beneficiary is allowed to (1) become the new account owner; (2) roll over the account to the spouse's own traditional or Roth IRA or qualified employer plan, such as a 401(k), 403(a), 403(b), or 457(b) plan; or (3) be treated as a beneficiary rather than account owner (in this case, see the rules for eligible designated beneficiaries below).

A spouse who takes ownership of an inherited traditional IRA must determine the RMD using his or her own life expectancy. A spouse who takes ownership of an inherited Roth IRA (rather than becoming a beneficiary) does not have to take an RMD. A spouse who is the sole beneficiary and chooses to be treated as beneficiary (rather than as owner) may postpone distributions until the original owner would have reached age 72. This rule applies to both traditional and Roth IRAs.

Designated Nonspouse Beneficiaries

A nonspouse beneficiary cannot take ownership of an inherited account. Instead, the account becomes an inherited IRA designated for the nonspouse beneficiary in the name of the deceased account owner.

Under the SECURE Act, a designated nonspouse beneficiary of an account owner who dies after December 31, 2019, must distribute the entire account balance by the end of the 10^th calendar year following the account owner's year of death (the "10-year rule"), regardless of whether the original account owner dies before or after the required beginning date. Beneficiaries may choose the frequency and timing of distributions so long as the account is depleted within the 10-year period.

Eligible Designated Beneficiaries

The SECURE Act allows for exceptions to the 10-year rule for an eligible designated beneficiary, which include (1) a surviving spouse, (2) the account owner's child who has not reached the age of majority, (3) an individual who is disabled, (4) a chronically ill individual, and (5) an individual who is not more than 10 years younger than the account owner. These eligible designated beneficiaries may generally take distributions over their remaining life expectancy rather than adhere to the 10-year rule. A minor child of an account owner who is a beneficiary may calculate distributions based on his or her remaining life expectancy until reaching the age of majority (age 18 in most states), at which point the remaining account balance must be distributed within 10 years.

Nondesignated or Estate Beneficiaries

If the account owner dies before the required beginning date and (1) does not designate a beneficiary or (2) designates a trust as beneficiary, the account balance must be distributed within five years ("the five-year rule"). Nondesignated and estate beneficiaries of a Roth IRA must take distributions as if the account owner died before the required beginning date (i.e., within five years). If the account owner dies after the required beginning date, the account balance must be distributed at the same rate or faster than the original account owner was taking distributions (i.e., the distribution period is based on the deceased account owner's life expectancy as of the year of death; life expectancy is reduced by one year for each subsequent RMD). The SECURE Act did not change distribution rules for nondesignated beneficiaries.

The distribution rules are summarized in Table 4. Distributions from inherited traditional IRAs are included in taxable income but are not subject to the 10% early withdrawal penalty. An individual who fails to take an RMD will generally incur a 50% excise tax of the amount that was required to have been withdrawn.

In some cases, IRAs have beneficiaries' distribution requirements that are more stringent than those summarized in Table 4. For example, an IRA's plan documents could require that a designated spouse or designated nonspouse beneficiary distribute all assets in the IRA by the end of the fifth year of the year following the IRA owner's death. In such a case, the beneficiary would not have the option to take distributions over a longer period of time. Unless the IRA's plan documents specify otherwise, it is possible to take distributions faster than required in Table 4. For example, a beneficiary may elect to distribute all assets in a single year (i.e., a lump sum distribution). In such a case, the entire amount distributed is included in taxable income for that year.

Distributions from inherited Roth IRAs are generally free of income tax. The beneficiary may be subject to taxes if the Roth IRA owner dies before the end of (1) the five-year period beginning with the first taxable year for which a contribution was made to a Roth IRA or (2) the five-year period starting with the year of a conversion from a traditional IRA to a Roth IRA. The distributions are treated as described in the "Nonqualified Distributions" section of this report.

Retirement Savings Contribution Credit

The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) authorized a nonrefundable tax credit of up to $1,000, or $2,000 if filing a joint return, for eligible individuals who contribute to IRAs or employer-sponsored retirement plans. The Retirement Savings Contribution Credit, also referred to as the Saver's Credit, is in addition to the tax deduction for contributions to traditional IRAs or other employer-sponsored pension plans. To receive the credit, a taxpayer must be at least 18 years old, not be a full-time student, not be a dependent on someone else's tax return, and have AGI less than certain limits. The limits are in Table 5. For example, individuals who make a $2,000 IRA contribution in 2022, have income of $18,000, and list their filing status as single would be able to reduce their 2022 tax liability by a credit up to $1,000, or 50% of the IRA contribution amount.³⁷

In 2019, the average credit claim was $191.³⁸ The credit was claimed by

• 6.1% of all tax returns,
• 7.4% of those with an AGI of $10,000 under $25,000 (with an average claim of $177), and
• 15.5% of those with an AGI of $25,000 under $50,000 (with an average claim of $200).³⁹

Under current law, since individuals under certain income thresholds may not have any tax liability or owe taxes that are less than the full amount of the credit, the benefit of a nonrefundable credit may be limited.

Data on IRA Assets, Sources of Funds, Ownership, and Contributions

The following tables provide data on IRA assets, sources of funds, ownership, and contributions.

Assets in IRAs

Table 6 contains data on the end-of-year assets in traditional and Roth IRAs from 2010 to 2020. According to the Investment Company Institute, traditional IRAs held much more in assets than Roth IRAs. At the end of 2020

• total traditional IRA balances were $10.3 trillion, and
• total Roth IRA balances were $1.2 trillion.

Most inflows to traditional IRAs come from employer-sponsored pension rollovers rather than from regular contributions.⁴⁰ For example, in 2018 (the latest year for which such data are available), within traditional IRAs, inflows from rollovers were $516.7 billion, whereas inflows from contributions were $18.6 billion.⁴¹ In contrast, within Roth IRAs, more funds flowed from contributions ($24.3 billion) than from rollovers ($12.5 billion) or conversions ($13.7 billion).⁴²

IRA Ownership Among U.S. Households

Table 7 and Table 8 provide data on IRA ownership among U.S. households. The data are from CRS analysis of the 2019 Survey of Consumer Finances (SCF).⁴³ The SCF is a triennial survey conducted on behalf of the Board of Governors of the Federal Reserve and contains detailed information on U.S. household finances, such as the amount and types of assets owned, the amount and types of debt owed, and detailed demographic information on the head of the household and spouse.⁴⁴ The SCF is designed to be nationally representative of U.S. households, of which there were 128.6 million in 2019.

Table 7 provides data on IRA ownership and account balances among households that owned IRAs in 2019.

The following are some key points regarding IRA ownership:

• In 2019, 25.3% of U.S. households had an IRA. Among households that owned IRAs, the median account balance ($70,000) was smaller than the average account balance ($253,799), which indicates that some households likely had very large IRA account balances.
• Households were more likely to own IRAs as the age of head of household increased. The median and average account balances also increased as the age of the head of the household increased.
• The percentage of households with an IRA and the median and average account balances increased with the income of the household. Among the explanations for this finding are that (1) households with more income are better able to save for retirement and (2) households with higher income are more likely to participate in a defined contribution plan and therefore have an account to roll over.⁴⁵
• Married households were more likely to have an IRA than single households and their median and average account balances were also larger. The explanations could include the following: both spouses in a married household might have work histories, enabling both to save for retirement or a married household might need larger retirement savings because two people would be using the retirement savings for living expenses in retirement.

Table 8 categorizes IRAs by the amount in the account. Among households that have IRAs, 56.4% have account balances of less than $100,000 and 6.0% have account balances of $1 million or more.⁴⁶

Contributions to IRAs

Table 9 provides data on contributions to traditional IRAs in 2018 (the most recent year for which data are available). About 4.4 million taxpayers contributed to traditional IRAs, with an average contribution of $4,198. More than 50% of individuals who made contributions to their traditional IRAs contributed the maximum amount.⁴⁷ Between 5% and 6% of taxpayers age 50 and older (not in Table 9) made catch-up contributions of less than the maximum $1,000 amount.

Table 10 provides data on contributions to Roth IRAs in 2018. Over 7 million taxpayers contributed to Roth IRAs, with an average contribution of $3,408. More than one-third of taxpayers who contributed to Roth IRAs in 2018 contributed the maximum amount. Between 7% and 10% of taxpayers age 50 and older (not in Table 10) made catch-up contributions of less than the maximum $1,000 amount.

Appendix. Qualified Distributions Related to Federally Declared Disasters and COVID-19

As part of the response to the 2005 hurricanes that affected the communities on and near the Gulf of Mexico, Congress approved provisions that exempted individuals affected by the storms from the 10% penalty for early IRA and qualified plan withdrawals. Congress has since approved similar provisions in response to various federally declared disasters. Table A-1 describes all provisions that have permitted penalty-free distributions in the case of federally declared disasters.

In the case of Hurricane Sandy in 2012, no legislation was passed that would have exempted individuals in areas affected by this natural disaster from the 10% penalty for early withdrawals from IRAs or defined contribution retirement plans.⁴⁸ Exemptions from the 10% penalty require congressional authorization. The IRS eased requirements for hardship distributions in areas affected by Hurricane Sandy in 2012. Among the relief offered by the IRS in Announcement 2012-44, "Plan administrators may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution" rather than require documentation from the employee of the need.⁴⁹ In addition, in the announcement, the IRS suspended the provision that required an individual to suspend contributions to 401(k) and 403(b) plans for the six months following a hardship distribution.⁵⁰