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Question: Jim, age 60 and single, receives a Form W-2, Wage and Tax Statement, reporting Box 1 income of $45,000. He also files Schedule C (Form 1040), Profit or Loss From Business, reporting net profit of $80,701. Jim has no other income and his Schedule 1 (Form 1040), Additional Income and Adjustments to Income, initially reports $5,701 in deductible self-employment tax. Jim does not contribute to a 401(k) plan with his employer. For 2024, can Jim contribute to both a SEP-IRA and a Roth IRA, assuming he satisfies the contribution deadlines and meets the requirements to establish the SEP-IRA?

Answer: Yes, he can contribute to both. For 2024 Jim can contribute $15,000 to a SEP-IRA and $8,000 to a Roth IRA.

Self-employed persons can adopt a SEP plan, and the contribution limit is generally the lesser of 25% of an employee’s compensation (limited to $345,000) or $69,000. In general, for plans that have a 25% plan contribution rate, the recalculated maximum rate of 20% applies to a self-employed owner. In Jim’s case, the contribution rate is the lower of $15,000 [($80,701 - $5,701) = $75,000) x .20)] or $69,000. Therefore, $15,000 is his maximum deduction. The $15,000 will be reported on his Schedule 1.

The SEP-IRA contribution will not affect his eligibility to make a Roth IRA contribution, assuming his modified adjusted gross income (MAGI) stays within the Roth IRA contribution limits.

Jim can contribute $8,000 (including the catch-up amount) to a Roth IRA, provided his MAGI is less than $146,000. If his MAGI is $146,000 or more, but less than $161,000, his contribution is reduced. At a MAGI of $161,000 or more, no contribution is allowed. For Roth contributions, Jim’s MAGI is $105,000 [($45,000 + $80,701 = $125,701) - ($5,701 + $15,000 = $20,701)]. Because his MAGI is below $146,000, he can contribute the maximum amount to his Roth IRA.