Question

Kathy is 48 years of age and self-employed. During 2018 she reported $110,000 of revenues and $44,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to a simplified employee pension (SEP) IRA for 2018? (Round your final answer to the nearest whole number)

Multiple Choice

$12,267.

$17,157.

$61,500.

$55,000.

Answer 1

Answer: $12,267

Explanation: Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) is a retirement benefit program for the Self-employed persons. As per SEP IRA, the maximum limit of contribution is different for “Self-employed persons with Employees” and “Self-employed persons with no Employees”.

In this case, Kathy is 48 years of age and self-employed, which means she is “Self-employed persons with no Employees”. So, the contribution towards SEP IRA should not exceed $55000 for the year or 18.587045% (20% of adjusted earnings) of net earnings.

Therefore,

Maximum Contribution by Kathy is lessor of the following;

a) Yearly limit of $55,000, or

b) 18.587045% of net earnings

                         = 18.587045% of $66,000

                       = $12,267.45

                     = $12,267 (rounded figure)

Here,

Net Earnings = Business Revenues – Deductible Business Expenses

                      = $1,10,000 - $44,000

                     $66,000

Explanation for Rate of 18.587045% (20% of adjusted earnings) of net earnings:

Adjusted earnings mean the half of your self-employment tax of 15.3% (7.65%) is deducted from the Net earnings. It means the Adjusted Earning will be 92.35% of Net earnings. Therefore, 20% of adjusted earnings (20% of 92.35%) will be 18.587045%