When Did Roth IRAs Start?

Most workers are familiar with the term “Roth IRA,” even if they’re unable to explain how one works. And for a sizable segment of the population, these tax-advantaged accounts represent a key tool in their retirement savings strategy. In 2023, Roth IRAs were owned by 31.9 million households, representing 24.3% of the U.S. population, according to the Investment Company Institute.

The roots of the Roth IRA go back nearly a quarter of a century to a period when access to individual retirement accounts (IRAs) was limited to a fairly small segment of the population. By creating a new type of IRA, one where the tax benefits were back-loaded, its proponents were able to expand eligibility to tax-advantaged retirement savings.

Taxpayer Relief Act of 1997

What It Said

The Roth IRA was created through the Taxpayer Relief Act of 1997. The bipartisan bill, most of which went into effect in January 1998, included a number of provisions that lowered the tax burden on Americans but also reduced government revenue. The Republican-sponsored bill included a significant cut in the capital gains tax, from 28% to 20%, to spur investment. As a compromise, it also gave Democrats the $400-per-child tax credit they wanted, which increased to $500 in 1999.

The legislation also included a new type of savings vehicle: the Roth IRA. IRAs, which provide owners with a tax write-off in the year when they make contributions, had been around since 1974. However, access to these accounts was sharply curtailed by the Tax Reform Act of 1986. As a result of that Reagan-era bill, only those without a workplace retirement account or with income below a specified level were allowed to contribute.

The Roth IRA—named after its primary architect, Sen. William Roth (R-Del.)—also provided a tax benefit to retirement investors, but it did so in reverse. Account owners would contribute after-tax dollars, giving them the ability to withdraw the money tax free at age 59½, as long as they owned the account for at least five years. Also, owners could pull out up to $10,000 for the purchase of a first home without incurring a penalty.

The original bill allowed individuals to contribute up to $2,000 annually toward traditional or Roth IRAs. In 2024 and 2025, anyone with earned income can invest up to $7,000 a year ($8,000 if they’re age 50 or older) toward these accounts.

The Taxpayer Relief Act also allowed existing IRA owners to convert their assets to a Roth version as long as they paid income tax on their account balance.

What It Did

The creation of these Roth accounts, and the conversion allowance in particular, provided an opportunity to expand IRA access without exploding the deficit—at least in the short term. While the government would receive additional income when people contributed to a Roth account or converted their traditional IRA to a Roth version, the Treasury would lose the revenue from withdrawals, which are generally tax free. Shortly after the Taxpayer Relief Act was passed, the Tax Foundation estimated that the IRA changes would result in $8.2 billion of revenue reduction in the first five years and a $20 billion reduction over 10 years.

Overall, the Taxpayer Relief Act largely represented a compromise that satisfied members of both parties. Budget savings spanned Medicare and Medicaid to auctioning licenses and excise taxes. Additional spending from the year prior was mainly in individual welfare (children’s health insurance initiatives and welfare reform law). It’s also been suggested that because the government was receiving an influx of revenue—made possible by the marginal tax rate hikes of 1993 and growth in the nascent technology sector—cooperation on difficult budget issues became easier.

The legislation passed with an overwhelming 389 votes in the House and by a 92-8 margin in the Senate (55 Republicans and 37 Democrats voted in favor). The Taxpayer Relief Act—together with the Balanced Budget Act of 1997, which sharply reduced Medicaid spending—was signed into law by then-President Bill Clinton on Aug. 5, 1997.

“IRA Plus” Becomes “Roth IRA”

While the Roth IRA didn’t come to fruition until 1998, the idea behind it originated several years earlier. In a 1989 interview with The Washington Post, Roth and Sen. Bob Packwood (R-Ore.) floated the concept as a way to make their capital gains tax cut proposal more budget-friendly. They initially called the new accounts, which allowed tax-free withdrawals in retirement, “IRA Plus.” Because IRA Plus owners would forgo their tax benefit until retirement, and others would pay income taxes when they converted their existing IRA to an IRA Plus, the Republican senators argued that the short-term impact on the federal budget would be lessened.

Roth, a Montana native, contended that a tax cut and an IRA expansion were complementary: The former would boost investment, while the latter would encourage savings. “To borrow a simile from my home state, one without the other would be like a henhouse without a rooster,” Roth said. “You may still get the eggs, but you’re not going to keep the hens happy.”

The two-pronged plan fizzled out but enjoyed renewed support in 1997 after Republicans took control of both chambers of Congress. Two years earlier, Packwood had resigned from the Senate amid a sexual misconduct scandal, leaving Roth as the new IRA’s main proponent. By the time the Taxpayer Relief Act was passed, the new accounts became Roth IRAs in his honor.

Modern Roth IRA Changes

The Roth IRA continues to evolve, and it’s not uncommon for the IRS to implement new changes. The SECURE 2.0 Act of 2022 made a few new rules permanent to the retirement account. One of those is a special rule granting tax relief to individuals who faced economic losses due to a qualified disaster. These rules allow tax-favored withdrawals and repayments from specific qualified plans. Note that qualified disasters have a specific definition according to the IRS.

Another change relates to excessive contributions. As of December 29, 2022, corrective IRA distributions addressing excessive contributions, exceeding the IRA contribution limit, and their earnings are exempt from the 10% early distribution tax. The corrective distribution must be completed by the due date of the income tax return.

Last, revised rules aim to provide relief to taxpayers unaware of the obligation to file Form 5329. and Other Tax-Favored Accounts. For nonfilers, the period of limitations begins when filing the income tax return for the violation year, extending the three-year limit to six years for excess contributions.

The Bottom Line

Roth IRA accounts have been a part of the tax code for nearly a quarter of a century and continue to be one of the most popular tools for retirement savings. Today, roughly one-fifth of U.S. households own one of these back-loaded IRAs, which provide tax-free income in retirement.