While the majority of doctors contribute to tax advantaged retirement accounts at their place of employment, many are unaware of additional retirement accounts that may be available to them with self-employed income, such as locums or side gig income where they receive income as a 1099 physician. There are several different retirement account options (solo 401k, SEP IRA, defined benefit plans, etc.) available to self-employed individuals or individuals receiving 1099 income, many of which actually allow you to contribute more to retirement accounts than you can through work or in addition to what you contribute at work. The solo 401k is one of our favorites to consider for physicians who are self-employed or do side gigs. Below, we cover what solo 401k plans are, the advantages and disadvantages, how to set one up, and alternatives if it isn’t the best option for you.
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Introduction to the Solo 401k for Self-Employed and Side Gig Physicians
The solo 401k is a plan by many names. You may also see it called a:
Solo-k
Self-employed 401k
Individual 401k
i401k
One-participant 401k
Uni-k
Regardless of the name, the plan has the same key features.
A solo 401k allows self-employed individuals and small business owners to have a 401k plan similar to those offered by traditional employers. The biggest limitation to who can have a solo 401k comes down to employees.
Solo 401ks, as the “solo” may suggest, are for business owners and entrepreneurs who don’t have any employees. The exception is if your spouse works for you and is on the payroll. Then they can participate in the plan as well. If you have a small business and employ your children part time so that they can have their own IRAs, you need to make sure that your solo 401k is set up in the plan documents such that the children are not eligible for the solo401k until they are 21. There are also other nuances to this, so check with your accountant if you plan on using a solo 401k and employing your children.
You can have 1099 independent contractors that you work with and still qualify, but you can’t have any W-2 employees on payroll besides yourself and a spouse (and potentially your minor children as above).
Like a regular 401k, the solo 401k is a retirement plan the government provides tax advantages for in order to incentivize saving for retirement. The main difference compared to standard 401k plans is that since you are self-employed, you manage both the employEE and employER portions of contributions, instead of just employee contributions with a plan provided through work.
As your own employer, you can still make a matching contribution to your own employEE. Just as employers receive a tax deduction for making matching contributions for their employees, you’ll receive a deduction for the designated employER contributions you make if you aren’t an incorporated entity.
Learn more about self-employed entity types for physicians.
Traditional Versus Roth Solo 401k Plans
Like regular 401ks, many solo 401k plans offer both traditional 401k and Roth 401k options.
With a traditional 401k, you fund your plan with pre-tax contributions, which lowers your taxable income for the year. Your contributions grow tax-deferred, then you pay taxes when you withdraw the funds in retirement.
With a Roth 401k, you make after-tax contributions. Your funds grow tax-free and you are not taxed on withdrawals in retirement.
You may or may not need to open two separate solo 401k plan accounts to take advantage of both components. This will depend on which company you use. Their account application will walk you through their specific process.
You will, however, need to make sure the company you open your plan with offers a Roth portion as part of their solo 401k plans if you want to use this feature. All plans offer traditional 401k pre-tax contributions, but not all allow post-tax Roth contributions.
Learn more about the advantages and disadvantages of traditional and Roth 401ks and considerations when deciding between them.
Our guidance remains the same for the solo 401k, though we remind you that your employER contributions must be made into a traditional 401k. There is no Roth IRA option for these contributions.
Solo 401k Contribution Limits
There are three different components to solo 401k contribution limits.
Employee Contribution Limits
Please note here that these contribution limits are assuming that you are not contributing to another retirement plan as an employEE. If you are maxing out your 401k at work with the full $23,000 for 2024, you will not be able to contribute to the employEE side of the solo 401k for your side gig or other self-employed income. Your total employEE contribution across all retirement accounts is subject to the $23,000 limit for 2024.
EmployEE contributions can be made up to either:
100% of your “earned income” for the year - or -
a limit of $23,000 for 2024 ($22,500 for 2023)
If you are 50+ years old, you are also eligible for catch-up contributions of an additional $7,500 every year, which brings the total to $30,500 for 2024 ($30,000 for 2023).
Your “earned income” is defined as your net earnings of your self-employment income, minus one-half of your self-employment tax amount and your employER contributions. This math can get a little confusing, so the IRS has a self-employed retirement plan contribution and deduction calculator.You can also find interactive calculators online.
Employer Contribution Limits
On the employER side, you can contribute up to 20-25% of compensation depending on how your business is classified from a tax standpoint, up to the total maximum contribution below, which is inclusive of the employEE contribution into the solo 401k.
If you are a sole proprietor (or an LLC taxed as a sole proprietor), you are able to take 20% of your net earnings. This means your net profit from the business (so after expenses) and minus the deduction for half of your self-employment taxes. The employER contribution is also limited to one half of the difference between your net earnings from self-employment and the contribution to the employEE side.
The rules are different if you are not taxed as a sole proprietor. If you are filing as an S-corporation, you can contribute up to 25% of your W2 income, still subject to the total maximum contribution below.
As you can see, this calculation is more complicated than the “earned income” on the employEE side once you take into account deductions, expenses to calculate your net income, self employment taxes, and other nuances of the rules, so we highly recommend confirming the numbers with your accountant and tax return, at least for your first year of setting up a plan, to make sure you don’t over contribute. You can read more about this on the IRS website here. Again note that these rules are also subject to change, so our information is meant to guide you rather than be the only source of information you use before determining your contribution amount. We are not accountants and this information is accurate to the best of our knowledge, but you should confirm.
Learn more about deductions to consider when calculating your net self-employment income.
Total Maximum Contribution Limits
The IRS has one final guidance on contribution limits. The total maximum contribution to your solo 401k each tax year when you combine the employEE and employER sides is $69,000 for 2024 ($66,000 for 2023).
Individuals 50+ still have their catch-up contribution of $7,500 for a maximum contribution limit of $76,500 for 2024 ( $73,500 for 2023).
Advantages of the Solo 401k
The solo 401k has several advantages, which makes it one of our favorite retirement plans to recommend to self-employed doctors.
Generally offers higher contribution limits than other options, including catch-up contributions
Offers the ability to contribute both as an employEE and an employER, allowing you to do the employEE portion as a dollar earned to dollar earned portion instead of the percentage of income earned on the employER side, potentially increasing the amount you can contribute overall
Roth contributions aren’t restricted by income
Gives the option to do both traditional and Roth contributions to maximize options for tax strategy
For a Backdoor Roth IRA, solo 401ks aren’t included in the IRS Pro-Rata rule like self-employed IRA options, so you can do both the solo401k and the Backdoor
Depending on your specific plan’s features, may allow for a Mega Backdoor Roth IRA
While regulations are state dependent, 401k plans generally offer better asset protection than IRAs
May have the ability to take out a loan (though this isn’t always recommended)
Disadvantages of the Solo 401k
Like most financial products and plans, the solo 401k has its disadvantages as well, which include:
Limited to sole proprietors or businesses where you are the only employee (although employing your spouse and/or minor children will not exclude you from using a solo401(k) depending on plan documents)
Contribution limits take into account total contributions across all 401k plans, including your employer plan from your main job, if applicable
Contribution limits are tied to your self-employed income, so if you only have a side gig, you may be limited in how much you can contribute
Can be a little complicated to set up with a separate EIN and depending on options that you choose, such as a Roth or mega backdoor Roth option, may require you to use a third party
Required to annually file a Form 5500-EZ once you reach an account balance of $250,000
The Form 5500-EZ, as the time implies, is made to be easy to complete, at least by IRS standards. Unlike regular employer 401k plans, the solo 401k doesn’t require discrimination testing, which reduces the amount of paperwork and record keeping.
The IRS provides direction on the Form 5500-EZ. An accountant can walk you through the form and filing if needed.
Opening a Solo 401k Plan
If the advantages outweigh the disadvantages in your situation, setting up a solo 401k is a relatively easy process that can usually be completed online or in a branch office of your brokerage. You will set yourself up as the plan administrator (employER) side and then treat yourself as a plan participant (employEE) side. Both can usually be managed through the same website.
Where to Get a Solo 401k Plan
Many online brokerage companies such as Fidelity and Vanguard offer solo 401k plans. These plans usually have low to no fees depending on your portfolio value.
If you already have a taxable brokerage account, it can benefit you to open your solo 401k plan with them, as fee calculations are often based on your overall holdings in all your accounts.
If you don’t have a taxable account yet, shop around and check fees and expense ratios for the assets you are thinking of investing in. The less you pay in costs, the more opportunity for compounding growth you have.
Deadlines for Opening a Solo 401k
Until 2022, you needed to open and fund a solo 401k before the end of a year to be able to make contributions for that year.
The SECURE Act 2.0 extended this to your tax filing day. This is generally April 15th, but may be March 15th if you have an S-Corporation. You may even be able to extend this into the fall if you file an extension, but we don’t always recommend this due to overfunding rules.
401k EIN Requirements
Before opening a solo 401k, depending on where you set it up, you may need an EIN as part of the initial setup. If you are planning on using your solo 401k to invest in alternative investments where you are a partner or receive a 1099 or K1, you will want to use the solo 401k EIN, NOT your business EIN. Other paperwork related to your plan may also require the EIN for the solo 401k, so there's a good chance you will need to set this up - it's just that the timing may vary.
These are free to obtain from the IRS and you can easily register for an EIN online in a few minutes, or by sending in IRS form SS-4. You will need the name, address, and phone number of the employer, the name of the trustee of the plan, and the name of the plan. These must match your plan adoption agreement/plan documents. Make sure you talk to your accountant to ensure this is done correctly.
Opening and Funding a Solo 401k
You can visit the small business retirement plans page of the company you would like to open your account with, such as:
Each brokerage firm offers a walkthrough on how to establish a new account. Their live chat or customer service numbers can provide you additional support if you need help during the process.
Once your account is set up, you can link a funding account (usually your primary checking account) so you can directly draw funds via ACH for your contributions.
When making your contributions, you will often have the option to choose whether you want to elect the contributions for this tax year or the previous tax year. Pay close attention to this selection for each contribution. If you contribute to the previous tax year after you’ve already filed your tax return, you’ll need to file an amended return and things can get messy. We recommend consulting a tax professional if you run into this situation.
You can make contributions throughout the year or in a lump sum at the end of the year or at the beginning of the next year, depending on your income situation.
If you have a regular, fairly dependent contractor income with known, predictable expenses, it may benefit you to make monthly contributions throughout the year.
If your self-employed income is highly irregular and/or if you earn a large self-employed income and you’re worried about overfunding your plan, it may make more sense to wait until you’ve calculated your income at the end of the year to determine how much you can contribute and potentially deduct. In this situation, you may want to set aside what you think you’ll contribute throughout the year into a short-term investment option until you make your annual contribution.
Alternatives for Self-Employed Physicians
If the disadvantages of the solo 401k outweigh the benefits in your situation, there are other tax-advantaged retirement plan options for self-employed and entrepreneurial physicians.
SEP IRA
With a SEP IRA, the employER makes all the contributions. There is no employEE side. If you are self-employed and don’t have any other employees, this won’t make a difference in the contribution amount.
With a SEP IRA, you can contribute up to 25% of your net self-employed earnings, similar to the employER side of a solo 401k. If you have additional employees, however, you have to contribute for all eligible employees as well.
A warning for high-income earning physicians and households: A SEP IRA will count against you when doing a Backdoor Roth IRA. If you do a Backdoor Roth or plan to in the future, the solo 401k is usually a better option than a SEP IRA.
Defined Benefit and Cash Balance Plans
A defined benefit plan or cash balance plan can be another great tax-advantaged retirement plan, especially if you don’t have any additional employees. These types of plans are more similar to pensions than 401ks.
Since they have a lot more regulation and requirements into the management and oversight, they are a lot more complicated and expensive to maintain than a solo 401k. This is not a DIY endeavor. However, if you have a large amount of self-employed income and cap out solo 401k contribution limits, these plans can be worth exploring because of the large amount of money you can likely put in pre-tax and reduce your taxable income.
Learn more about other self-employed retirement plan options on our guide to side gig finances and self-employed income.
FAQs for Solo 401ks
Below, we cover some of the most commonly asked questions we see regarding solo 401k plans. If you don’t see your question below, ask the hive mind in our Physician Side Gigs Facebook group.
Can I have a solo 401k if I have a regular 401k through my employer?
Yes. If you are a W-2 physician and also have self-employment income through side gigs, you can have both a solo 401k and an employer-sponsored 401k plan. As noted above, though, be mindful of your contribution limits. The max employEE contribution limit per tax year applies across all your 401k plans. You cannot max out your employer sponsored plan and your solo 401k. This will result in an overfunding issue.
If you have the option for both and aren’t sure how much to contribute to which, consider the different fees and costs associated with each plan. If you have an employer match, it’s worth contributing as much as you can for the free matching, as a match is usually the best return on investment you can get in the stock market. Additionally, in many cases, you may as well max the employer plan and use your self employed income for the employER side of the solo 401k.
An exception: if you don’t have a Roth 401k option at work, you may want to contribute to a solo 401k after taking your match to optimize your tax strategy. It can be worth working with one of our financial advisors to put together a comprehensive financial plan.
Remember for your solo 401k, you are restricted to how much you can contribute based on your self-employed income, not your overall income.
Can you have multiple solo 401ks?
It is possible to have multiple solo 401ks, especially if you have multiple sources of self-employed income. If you run multiple small businesses, it may benefit you to have multiple solo 401ks.
While your employEE contribution limit won’t change, you will have the opportunity to contribute more on the employER side for each, depending on how much income you generate from each side gig. View our contribution limits above.
Can I have a solo 401k and a SEP IRA or defined benefit plan?
These plans are not mutually exclusive. You can have a SEP IRA and a solo 401k, but the contribution limit across both plans combined will be limited to the contribution limits above. Since there is no benefit on either the employEE or employER side and given the extra headache of having to manage both, it’s generally not worth it to do both.
A defined benefit plan, however, has much higher contribution limits for high-income earners, which can be a great way to funnel additional tax-advantaged contributions into retirement planning on the employER side.
Learn more about defined benefit plans in our guide to self-employed finances.
What do I do with my solo 401k if I no longer do contractor side gigs or work for myself?
If you have a solo 401k plan you are no longer using, you have a few options on what to do. The simplest option is to leave it invested where it is, especially if you aren’t paying any account management fees on it.
You also have the option of rolling it over into an employer-sponsored plan with your new employer if you want to, though we recommend checking what the investment options, and associated fees, within the plan are. A financial planner can help you do a cost-benefit analysis of your options.
You may be able to roll it into an IRA as well, but if you are doing a Backdoor Roth IRA every year or plan to do one in the future, we don’t recommend this option, as this will put pre-tax funds into an IRA, which will then create a tax bill for your Backdoor Roth IRA under the Pro-Rata rule.
What do I do if I accidentally overfunded my plan?
If you reach tax time and realize you accidentally overfunded your plan, it is fixable.
If you withdraw your excess contributions by April 15, the IRS waives the 10% early distribution penalty, 20% withholding requirements, and the spousal consent requirement. There will likely still be tax implications, but you won’t get hammered with penalties.
If, however, you miss the April 15th deadline, you’ll be subject to double taxation on them, where they are taxed in both the calendar year they were overfunded and the calendar year you withdrew them in to fix your mistake.
The IRS provides a 401(k) plan fix-it guide for overfunding. An accountant can also help walk you through the process to correct any mistakes.
Conclusion
While the solo 401k isn’t the right fit for all self-employed physicians, especially if they have employees, it’s a powerful tax-advantaged option to consider if you qualify.
To learn more about self-employed finances and retirement plans, explore some of our related resources: