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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? (Round your intermediate calculations and final answers to the nearest whole dollar amount.)

a. She sets up a SEP IRA.  

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

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Answer #1
Net Earning (before qualified plan deduction) $130,000.00
Calculate 1402(a)(12)Deduction $120,055.00 (130000 x 92.35%)
Calculate Medicare & FICA $18,368.42 (120055 x 15.30%)
1/2 of Self-Employment Tax $9,184.21 (120055 x 7.65%)
Self-Employment Income $120,815.79 (130000 - 9184.21)
Maximum contribution to SEP IRA is lower of 55,000 or 20% of self employment income
That is 120815.79 x 20%
Maximum SEP IRA contribution $ 24,163.16
Maximum contribution to 401 K is lower of 55000 or 20% of self employment income plus 18,500 plus a catch up
contribution of 6000 for people 50 or older
Basic $ 24,163.16
Add: 18500 18500
Add: catch up 6000
Maximum 401 K contribution $ 48,663.16
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