Question

rita is a self-employed taxpayer who turns 39 years old at the end of the year (2023). in 2023, her net schedule c income was $278,000. this was her only source of income. this year, rita is considering setting up a retirement plan. what is the maximum amount rita may contribute to the self-employed plan in each of the following situations?

Answer 1

For a SEP IRA, Rita can contribute up to 25% of her net schedule C income or $61,500, whichever is less. For a Solo 401(k) plan, Rita can contribute up to $19,500 as an employee and up to 25% of her net schedule C income as an employer, with a combined total limit of $58,000.

Step-by-step explanation:

To determine the maximum amount Rita may contribute to the self-employed plan, we need to consider the type of retirement plan she chooses. As a self-employed taxpayer, Rita can set up a Simplified Employee Pension (SEP) IRA or a Solo 401(k) plan.

For a SEP IRA, the maximum contribution is limited to 25% of her net schedule C income or $61,500 ($278,000 x 0.25), whichever is less.

For a Solo 401(k) plan, the maximum contribution consists of two parts: an employee contribution and an employer contribution. The employee contribution is limited to 100% of her net self-employment income or $19,500, whichever is less. The employer contribution is limited to 25% of her net schedule C income, up to a combined total of $58,000 ($19,500 + $38,500).