Before the introduction of the Roth Individual Retirement Arrangement in 1993 and changes to contribution rules, the term “contributory” identified one version of what is now known as a Traditional Individual Retirement Account. Although there are now multiple types of IRAs, at the time there was only one available choice. Today a contributory IRA can refer to a Traditional IRA that doesn't include rollover funds, or to a Roth IRA.
IRA Contribution Rules
Before 1993, Internal Revenue Code rules did not allow investors to roll funds from an IRA that contained investor contributions into another qualified retirement plan. However, the rules did allow investors to roll funds from an IRA made up solely from funds rolled in from other qualified retirement plans into another qualified retirement plan. The term “contributory” identified an IRA that contained investor contributions and the term “rollover” identified an IRA that contained only rollover funds.
Post-1993 Rule Change
The Internal Revenue Code now allows investors to roll funds from a Traditional IRA into another qualified retirement plan regardless of the source, so the rule no longer applies. Although IRA providers still occasionally talk about a Traditional IRA in terms of whether it’s a contributory or rollover account, according to Morningstar Advisor the Internal Revenue Code no longer distinguishes between the two and there are no tax implications.
Even though a contributory IRA designation is irrelevant in most situations, it may still have implications in a bankruptcy action. Although protections in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 include Traditional and Roth IRA retirement accounts, the law may not protect the entire amount in a contributory Traditional IRA.
As of publication date, the BAPCA protects up to $1 million of the funds in a Roth IRA or a Traditional IRA that includes owner contributions, but protects the entire amount in a pure rollover IRA, regardless of the balance.
Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.