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Reggie is a self-employed taxpayer who turns 59 years old at the end of the year...

Reggie is a self-employed taxpayer who turns 59 years old at the end of the year (2018). In 2018, his net Schedule C income was $300,000. This was his only source of income. This year, Reggie is considering setting up a retirement plan. What is the maximum amount he may contribute to the self-employed plan in each of the following situations?

a. He sets up a SEP IRA.

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

Solutions

Expert Solution

Information Given -

Reggie is a self-employed taxpayer who turns 59 years old at the end of the year (2018).

In 2018, his net Schedule C income was $300000. This was his only source of income.

.

(a) -- He sets up a SEP IRA.

Answer -

As per U.S. Internal Revenue Service, for 2018, a Self-employed persons can contribute up to 20% of their Net self-employment earnings in a SEP IRA, not to exceed the maximum contribution limit of $55000.

In the given case, Reggie​​​​​​​'s contribution to SEP IRA is $55000.

Computed as follows:

A.

20% of Net self-employment earnings -

= (Net Schedule C income - Self employed tax deduction) * 20%

= [$300000 - ($300000 * 92.35% * 15.3% * 50%)] * 20%

= [$300000 - $21194.325] * 20%

= $55761

 $55761
B. Maximum contribution limit to SEP IRA, as per U.S. Internal Revenue Service $55000

Reggie​​​​​​​'s contribution to SEP IRA = Lesser of (A) or (B)

 $55000

.

(b) -- He sets up an individual 401(k).

Answer -

As per U.S. Internal Revenue Service, Contributions to individual 401(k) is limited to the lesser of -

  • 20% of Net earnings from self employment plus $24500; or
  • The maximum contribution limit of $55000. An Individuals 50 and older can add an extra $6000 per year in "catch-up" contributions, bringing the total to $61000.

In the given case, Reggie​​​​​​​'s contribution to Individual 401(k) = $61000.

Computed as follows:

A.

20% of Net self-employment earnings + $24500 -

= [(Net Schedule C income - Self employed tax deduction) * 20%] + $24500

= [{$300000 - ($300000 * 92.35% * 15.3% * 50%)} * 20%] + $24500

= [($300000 - $21194.325) * 20%] + $24500

= $55761 + $24500

= $80261

 $80261
B. Maximum contribution limit to Individual 401(k), as per U.S. Internal Revenue Service $61000

Reggie​​​​​​​'s contribution to Individual 401(k) = Lesser of (A) or (B)

 $61000

ekkarill92 answered 2 years ago
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