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.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.