Determine the maximum contribution that can be made to a Keo

Determine the maximum contribution that can be made to a Keogh plan in each of the following case n al instances, the individual is selt-employed, and the self-employment tax reduction has already been taken a. Self-employment income of $59,000. b. Self-employment income of $59,000 and wage income of $36,500 c. Self-employment income of $170,000 d. Self-employment income of $293,000. a. Maximum Keogh plan contribution b. Maximum Keogh plan contribution C. Maximum Keogh plan contribution d. Maximum Keogh plan contribution S 53,000

Solution

In all cases, the maximum Keogh contribution is limited to the lesser of $45,000 or 25% of earned income from self-employment (limited to $225,000) after the Keogh contribution.

The amount of self-employment income after the Keogh contribution can be determined by the formula:

x = SE income before Keogh - .25x

a) The amount of self-employment income after the Keogh contribution is $44,250. Thus, the maximum Keogh contribution is $14,750 (the lesser of $45,000 or 25% of $59,000).

b) The answer to part (b) is the same as part (a).The wage income of $36,500 does not affect the calculations since it is not income from self-employment.

c)The amount of self-employment income after the Keogh contribution is$127,500.Thus, the maximum Keogh contribution is $42,500 (the lesser of$45,000 or 25% of $170,000).

d) Here, self-employment income exceeds the $225,000 maximum.Thus, the amount of allowed self-employment income after the Keogh contribution is $180,000 (based on the $225,000 maximum, not the $293,000 earnings from self employment). The maximum Keogh contribution is $45,000 (the lesser of$45,000 or 25% of $180,000).