Kathy is 60 years of age and self-employed. During 2020 she reported $538,000 of revenues and $119,000 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 a SEP IRA for 2020?Assume she pays $28,484 in self-employment for 2020. (Round your final answer to the nearest whole number.)
A)$57,000.
B)$63,500.
C)$80,952.
D)$390,516.

Question

Quizplus · Accepted Answer

The maximum contribution to a SEP IRA for 2020 is the lesser of 25% of compensation or $57,000. Kathy's net earnings from self-employment are calculated as revenues minus expenses, which equals $538,000 - $119,000 = $419,000. However, for SEP IRA contributions, net earnings must be reduced by the self-employment tax deduction. The self-employment tax deduction is half of the self-employment tax, which is $28,484 / 2 = $14,242. Therefore, her adjusted net earnings are $419,000 - $14,242 = $404,758. The contribution limit is 25% of this adjusted net earnings, but since the maximum contribution limit for a SEP IRA in 2020 is $57,000, and 25% of her adjusted net earnings exceeds this amount, the maximum she can contribute is $57,000.

Kathy Is 60 Years of Age and Self-Employed