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 $268,000. 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.

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

Solutions

Expert Solution

Ans- Calculation of the maximum amount Rita may contribute in self employed plan in each of the following situation:

a- She sets up a SEP IRA:-

According to SEP IRA total contribution can not exceed limited lesser amount of $55,000 or 25% of met income of self employment.

Calculation of the Rita SEP IRA net income:-

According to Net schedule C income only 92.35%

Rita net earnings= $268,000*92.35%

=$247,498

Contribution = $247,498*25%

=$61.874.50

Therefore, maximum amount Rita contribute lesser amount is $55,000

b- She sets up an individual 401 (k):-

According to individual 401 (k) total contribution can not exceed the limited lesser amount of $55,000 or 25% of net income of self employment plus $18,500

Calculation of the Rita individual 401 (k) net contribution

According to Net schedule C income only 92.35%

Rita net earnings= $268,000*92.35%

=$247,498

Contribution = ($247,498*25%)+$18,500

=$61,874.50+$18,500

=$80,374.50

Therefore, maximum amount Rita contribute lesser amount is $55,000.

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