Calculate allowable Roth contribution after SEP

Forum|Forum|2 years ago
April 2, 2024
1 reply
0 views

How can the allowable Roth IRA contribution be calculated in the following scenario?

The taxpayer is retired and, just for the example, expects to be in the 22% tax bracket.

The taxpayer earns just $3000 as an independent contractor. This is the entire earned income for the year. The taxpayer must pay SEP tax on this income.

The taxpayer wants to contribute the maximum allowable to a Roth IRA as soon as possible (assume it's early in the tax year) but does not wish to make an excess contribution that must later be withdrawn.

How does the taxpayer calculate the maximum amount they can contribute to a Roth IRA?

Best answer by dmertz

By "SEP" I assume that you mean self-employment tax, not a SEP contribution.

Being in the 22% tax bracket, I'll assume that eligibility to make a Roth IRA contribution is not limited by modified AGI.

$3,000 of net profit from self-employment means $424 of self-employment tax. Subtracting the deductible portion of self-employment tax, $212, from $3,000 leaves net earnings of $2,788 available to support a Roth IRA contribution.