Unless you have a Roth IRA, you can make contributions to your IRA with pre-tax dollars: you don't pay income taxes on the money the year it comes out of your income and goes in your IRA. The IRS limits the amount you can contribute to an IRA tax-free. However, for people over 50 years of age, the IRS allows some modest “catch-up payments” because you’re closer to retirement.
The Internal Revenue Service allows a tax-free contribution of $6,000 for people over 50 if they have a traditional IRA. For example, if you have an adjusted gross income of $50,000, you can contribute $6,000 to your IRA and show only $44,000 of adjusted gross income. You would only pay taxes on the $44,000 amount.
A Savings Incentive Match Plan for Employees -- or SIMPLE IRA -- allows employees of businesses with fewer than 100 employees to set aside income tax-free. Over the age of 50, an employee can set aside up to $14,000 of income. For example, an employee with a taxable income of $50,000 can contribute $14,000 to her SIMPLE IRA and therefore only pay taxes on $36,000 of income.
A Simplified Employment Pension -- or SEP IRA -- is for self-employed people and their employees. You can set aside 25 percent of your income as an employee or 20 percent of your income as an owner. The limit on the total amount you can set aside is $50,000.
Your contributions to a Roth IRA work differently. You pay taxes on the money you put in a Roth IRA, but you don’t pay any tax when you withdraw that money at retirement. By contrast, for other types of IRAs, you pay no tax now but pay when you withdraw. You can put $6,000 a year in a Roth IRA if you are over 50. This contribution won’t reduce your taxes now, but it will be tax-free in retirement.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.