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 (2017). In 2017, his net Schedule C income was $316,000. 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).

Expert Solution

Answer:
a. $49,000. Contributions to SEP IRAs are limited to the lesser of $49,000 minus other contributions (employer and employee) to other qualified defined contribution accounts or 20% of net earnings from self-employment. Reggie’s earnings from self-employment equals $277,050 ($3,16,000 × .9235). His contribution is limited to $58,365 ($2,91,826 × 20%). However, it is further limited to $49,000. Note that the maximum contribution to a SEP IRA does not depend on age.

b. $54,500. Contributions to individual 401(k)s are limited to the lesser of $49,000 or 20% of net earnings from self-employment plus $16,500 . However, if the taxpayer is 50 years old or older as of the end of the year, the taxpayer may contribute an additional $5,500. Therefore, the maximum amount that Reggie may contribute is $54,500 ($49,000 + $5,500). Thus, Reggie may contribute the lesser of (1) $54,500 (49,000 +5,500) or (2 )$80,365 [20% × $291826 ($3,16,000 × 92.35%)+ $16,500 + 5,500]. So, his maximum contribution is $54,500.

ekkarill92 answered 1 year ago

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

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