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Hope is a self-employed taxpayer who turns 54 years old at the end of the year...

Hope is a self-employed taxpayer who turns 54 years old at the end of the year (2018). In 2018, her net Schedule C income was $130,000. This was her only source of income. This year, Hope is considering setting up a retirement plan. What is the maximum amount Hope 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).

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Expert Solution

Information Given -

Hope is a self-employed taxpayer who turns 54 years old at the end of the year (2018).

In 2018, her net Schedule C income was $130000. This was her only source of income.

.

(a) -- She 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, Hope's contribution to SEP IRA is $24163.

Computed as follows:

A.

20% of Net self-employment earnings -

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

= [$130000 - ($130000 * 92.35% * 15.3% * 50%)] * 20%

= [$130000 - $9184.2075] * 20%

= $24163.

 $24163
B. Maximum contribution limit to SEP IRA, as per U.S. Internal Revenue Service $55000

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

 $24163

.

(b) -- She 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, Hope's contribution to Individual 401(k) = $48663.

Computed as follows:

A.

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

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

= [{$130000 - ($130000 * 92.35% * 15.3% * 50%)} * 20%] + $24500

= [($130000 - $9184.2075) * 20%] + $24500

= $24163 + $24500

= $48663

 $48663
B. Maximum contribution limit to Individual 401(k), as per U.S. Internal Revenue Service $61000

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

 $48663

ekkarill92 answered 2 years ago
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