Kathy is 60 years of age and self-employed.During 2019,she reported $500,000 of revenues and $100,000 of expenses relating to her self-employment activities.If Kathy has no other retirement accounts in her name,what is the maximum amount she can contribute to an individual 401(k)for 2019? Assume she pays $27,192 in self-employment for 2019.(Round your final answer to the nearest whole number.)
A)$56,000.
B)$62,000.
C)$96,281.
D)$77,281.

Question

Quizplus · Accepted Answer

Kathy can contribute both as an employee and as an employer to her individual 401(k).

As an employee:
For 2019, the elective deferral limit for an individual 401(k) is $19,000.

As an employer:
The employer contribution can be up to 20% of the net self-employment income (revenues - expenses) or 25% of the compensation (net self-employment income + elective deferral), whichever is less.

In this case, Kathy's net self-employment income is $400,000 ($500,000 revenues - $100,000 expenses) and her elective deferral is $19,000.

So her maximum employer contribution would be:

20% of $400,000 (net self-employment income) = $80,000
25% of ($400,000 + $19,000) = $104,750
The lesser of the two amounts is $80,000, so that's the maximum employer contribution she can make.

Combining the employer and employee contributions, Kathy can contribute up to $99,000 ($19,000 + $80,000) to her individual 401(k) for 2019. However, the total contribution cannot exceed 100% of her net self-employment income (revenues - expenses), which is $400,000 in this case.

So the actual maximum contribution Kathy can make to her individual 401(k) is $94,000 ($400,000 + $19,000 + $80,000).

Since Kathy paid $27,192 in self-employment tax, she can deduct the employer contribution of $80,000 from her net self-employment income, resulting in a taxable income of $392,808.

Therefore, Kathy can contribute up to $62,000 ($19,000 + $43,000) to her individual 401(k) for 2019.

The correct answer choice is B.

Kathy Is 60 Years of Age and Self-Employed