Question

Required information Problem 13-85 (LO 13-5) (Algo) below.]

Rita is a self-employed taxpayer who turns 39 years old at the end of the year (2022). In 2022, her net Schedule C income was $294,000. 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?
Note: Round your intermediate calculations and final answers to the nearest whole dollar amount. Problem 13-85

a. She sets up a SEP IRA.
Maximum contribution _____

Answer 1

Rita can contribute the lesser of 25% of her net earnings from self-employment or the annual SEP IRA contribution limit for the tax year 2022 to her SEP IRA retirement plan. Since her earnings were $294,000, her maximum contribution amount is 25% of that amount unless this figure exceeds the IRS's annual limit for that year.

Step-by-step explanation:

For a self-employed individual like Rita setting up a Simplified Employee Pension (SEP) IRA, the maximum contribution is limited to the lesser of 25% of net earnings from self-employment or a specified annual limit. Given Rita's net Schedule C income of $294,000 for the year 2022, her contribution is calculated as follows:

• Net earnings from self-employment = $294,000
• Contribution limit (25% of net earnings) = 0.25 × $294,000

The calculation provides a figure that needs to be checked against the annual SEP IRA contribution limit, which is subject to change and can be updated annually by the IRS. It is important to use the limit for the correct tax year, for which Rita would need the most current figures.

Therefore, based on the information provided, Rita's maximum SEP IRA contribution for 2022 can't be calculated precisely without the annual limit for 2022. However, it is 25% of her net earnings, provided this does not exceed the updated limit for the tax year 2022.