Question

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Reggie is a self-employed taxpayer who turns 59 years old at the end of the year (2019). In 2019, 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? (Round your intermediate calculations to the nearest whole dollar amount.)

a. He sets up a SEP IRA.  

Maximum contribution $______

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

Maximum contribution $______

Answer 1

Reggie may contribute up to 25% of his compensation which is $348,000, provided the contribution does not exceed $51,000 (maximum limit). 25% of $348,000 is $87,000, therefore he can contribute only $51,000 in SEP IRA. As Reggie is a self-employed taxpayer and above the age of 50, he can contribute in two ways in 401(k) plan: Elective deferrals up to 100% of compensation to a limit of $24,000 (as he is above the age of 50) Schedule C sole-proprietors must do an added calculation starting with earned income to determine their maximum contribution, which, in effect, is 20% of earned income. Maximum limit is $60,000 In this case, the calculation is $24,000+($348,000*20%) = $24,000+$69,600 = $93,600 So in conclusion, Reggie can contribute maximum of $60,000 in 401(k)