A Short History of Taxes and the Advantage of Self-Directed IRAs

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Most Americans don’t know that the iconic President Lincoln was the initial enactor of income taxes in the United States. In 1862, Lincoln proposed an income tax as part of a monetary measure to help pay for Civil War expenses. Americans with annual incomes between $600 and $10,000 were taxed 3%, and annual incomes above $10,000 were taxed 5%. By 1872, income tax was repealed.

With the Wilson Tariff Act of 1894, income tax was revived. Around the turn of the 20th century, the states ratified the 16th Amendment to read: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” The War Revenue Act of 1917 raised the top tax bracket to 67% to help fund WWI.

After WWI there was a decline in the top tax bracket rates until a sharp upturn in 1941, as a consequence of American involvement in WWII. The Revenue Act of 1942 increased the number of residents subject to taxation, and raised the top tier tax rate to 88%.

From 1964 through 1980, the top tax bracket’s taxation percentage stayed between 70 and 80 percent. The Economic Growth and Tax Relief Reconciliation Act of 2001 was the third largest tax cut since WWII. Tax rates fell steadily until they leveled out between 30 and 40 percent in 1987, and have stayed there until present day.

Retirement accounts, established in 1974, have always enjoyed unique tax advantages for investors.  Regardless of changes in income tax or an investor’s tax bracket, investors can enjoy the pre-tax benefits of a Traditional IRA and the post-tax benefits of a Roth, as long as they meet the qualifications for each account type. Additionally, Traditional IRA contributions may be tax-deductible, although the phase-out limits for these contributions are dependent on annual income (learn more here).

With self-directed IRAs, investors can use their tax-advantaged accounts to invest in assets that lie outside of the restrictions of publicly traded stocks and bonds. Real estate, precious metals, and private loans can all be purchased with a self-directed IRA, and any returns on these assets enjoy the benefit of being tax-advantaged.

Learn more about Traditional IRA contributions and Roth IRA contributions, and feel free to contact New Direction today with any of your self-directed IRA questions. 

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