Question

For each taxpayer, compute the maximum contribution to the retirement plan.

a. Lewis, a self-employed individual, has net earned income of $50,000 in 2018. If Lewis has no employees, calculate the maximum contribution to a SEP plan that he may deduct from his adjusted gross income.
$_____________

b. During 2018, Linda, age 32, has a salary of $40,000. She participates in a Section 401(k) plan and chooses to defer 25 percent of her compensation.

What is the maximum amount Linda can contribute to the Section 401(k) plan on a tax-deferred basis?
$______________

If Linda's salary was $125,000, instead of $40,000, what is the maximum amount that she could contribute to the Section 401(k) plan on a tax-deferred basis?
$________________

Answer 1

a. A self employed individual can contribute up to the limit of 20% of net earned income after adjustment for half self employed tax to a SEP, subject to maximum $55000.

Net earned income - $50000

Deduct 7.65% (15.3% x 1/2) for self employed tax = $3825

Net adjusted income = $46175

Maximum contribution - 20% of 46175 = $9,235

b. Maximum contribution to Section 401(k) plan for year 2018 is $18,500.

Linda's Salary = $40,000

Defer percentage = 25% of salary

Contribution = 40000 x 25% = $10,000

If Linda's salary is $125000 instead of $40000, maximum amount that she can contribute to the Section 401(k) plan on tax deferred basis is $18,500