Question

Required information [The following information applies to the questions displayed below.] Hope is a self-employed taxpayer who turns 54 years old at the end of the year (2019). In 2019, 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? (Round your intermediate calculations and final answers to the nearest whole dollar amount.) a. She sets up a SEP IRA. Maximum contribution

Answer 1

a) Hope is a self-employed tax payer, therefore, she can contribute up to a maximum amount each year toward a SEP-IRA retirement account. The limit changes, but currently She can put up to $56,000 toward a SEP-IRA.

Maximum Contribution - As of FY19, the maximum amount she can put into a SEP IRA each year is $56,000. The annual limit is adjusted by the IRS periodically and contributions are tax-deductible.

Adjusted Net Earnings

As of FY19, self-employment tax is 15.3% on the first $128,400 of net earnings, so reduce net earnings by one-half of 15.3 percent, or 7.65 percent, or multiply net earnings by 92.35 percent.

Allowable SEP Contributions

Hope can contribute up to 25 percent of your adjusted net earnings from self-employment to a SEP IRA or the yearly dollar limit, whichever is less. Hope's net earnings total is $130,000.

Multiply by 92.35 percent to find the adjusted net earnings of $120,555. Multiply $125,005 by 25 percent to find SEP contribution limit of $30,013.75.

b) The IRS says a self employed can contribute up to $54,000 in your tax-deferred Self-Employed 401(k) for FY17. Since, Hope is of 54yrs old, then She can make an additional $6,000 catch-up contribution, which increases your limit to $60,000.

Contributions to individual 401(k)s are limited to the lesser of $54,000 or 25% of net earnings from self employment plus $16,500. However, if the taxpayer is 50 years old or greater as of the end of the year, the taxpayer may contribute an additional $6000. Therefore, the maximum amount Hope may contribute is $52,513 ($30,013 + $22,500). The contribution may not exceed net earnings from self-employment.

I hope it helps :)