Kathy is 60 years of age and self-employed. During 2020, she reported $534,000 of revenues and $106,800 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 2020?Assume she pays $28,348 in self-employment for 2020. (Round your final answer to the nearest whole number.)
A)$57,000.
B)$63,500.
C)$102,105.
D)$82,605.

Question

Quizplus · Accepted Answer

The maximum amount Kathy can contribute to an individual 401(k) for 2020 is calculated as follows:
- First, we determine Kathy's net earnings from self-employment, which is calculated as revenues minus expenses. This is $534,000 - $106,800 = $427,200.
- Next, we subtract the amount Kathy contributed to a SIMPLE IRA (if any) during the year. The problem states that Kathy has no other retirement accounts in her name, so there is nothing to subtract here.
- We then calculate Kathy's maximum contribution to an individual 401(k) as 20% of her net earnings from self-employment, minus her self-employment tax deduction. The self-employment tax deduction is equal to 50% of Kathy's total self-employment tax liability, which is calculated as 15.3% of her net earnings from self-employment. So:
Maximum 401(k) contribution = 20% x $427,200 - ($28,348 x 0.5)
= $85,440 - $14,174
= $71,266

Since the maximum contribution allowed for 2020 is $63,500 ($19,500 as salary deferral and additional $6,500 as catch-up contribution), Kathy can contribute up to $63,500 to her individual 401(k) for 2020.

Kathy Is 60 Years of Age and Self-Employed