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Rita is a self-employed taxpayer who turns 39 years old at the end of the year...

Rita is a self-employed taxpayer who turns 39 years old at the end of the year (2018). In 2018, her net Schedule C income was $282,000. This was her only source of income. This year, Rita is considering setting up a retirement plan. What is the maximum amount Rita may contribute to the self-employed plan in each of the following situations?

a. She sets up a SEP IRA.  

Maximum contribution _______________?

b. She sets up an individual 401(k).

Maximum Contribution _______________?

Solutions

Expert Solution

A) $54053

Contributions to SEP IRAs are limited to the lesser of (1) $55000 or (2) 20%(as she is self employed) of net schedule C income (minus deduction for self-employment taxes)

.self employment income is equal to 92.35% of schedule c income i.e. 282000×92.35% = $260427. The second limitation is computed as follows:The social security limit for 2018 is $128400. The self-employment tax on $128400 is $19646($128400 × .153). The self-employment tax on the remaining $132027 ($260427 minus $128400) is $3829 ($132027 ×.029). Rita can deduct 50% of the self-employment taxes she paid. In this situation, Rita’s self-employment tax deduction is $11737 [($19646 + $3829) × 50%)]. Thus the second limit for her SEP IRA contribution is $54053 [($282000 minus $11,737) × 20%]. Consequently, her SEP IRA contribution will be $54053

B) $55000

According to individual 401(k) total contribution cannot exceed amount lessor of $55000 or 25% of net income of self employment plus $18500.

So, calculation of Rita individual 401(k) net contribution.

Self employment earning = $260427.

Contribution = (25% × $260427) + $18500

= $65106.75 + $18500

= $83606.75

Therefore, rita's maximum contribution can be $55000

For any query please comment and

DO GIVE POSITIVE RATING

ekkarill92 answered 2 years ago
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