Understand that there are two different kinds of IRAs - Traditional IRA and Roth IRA. In a Traditional IRA, you contribute pre-tax dollars. You will pay taxes on it when the money is withdrawn. You will also be able to reduce your taxable income on your taxes by contributing to a Traditional IRA.
A Roth IRA is just about the opposite. You are taxed on the money going in, so you contribute post-tax dollars. This will not reduce your taxable income by contributing to a Roth IRA. One of the attractive features of a Roth IRA is that you do not need to pay taxes going out. The money is all yours.
The IRA contribution limits for both 2015 and 2016 is $5,500. If you are over the age of 50, you are permitted to contribute $1,000 more as a catch up. Remember that this limit is per person and it is total for the year, not per IRA if you have 2 or more. The limit also changes if your Adjusted Gross Income is more than $116,000 for single filers or $183,000 for married filers. The limits go up to $117,000 and $184,000 for 2016.
Self employed people have a few more choices. They can contribute to SEP IRAs or Simple IRAs. The good news is that the Simple IRA has a contribution limit of $12,500 for 2015 and 2016. The SEP IRAs let you contribute the lesser of $53,000 or 25% of your compensation or profit from your self employed business.
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