While most physicians are aware of standard employer sponsored 401k plans, there are also several tax-advantaged retirement plan options for small business owners, self-employed physicians, and doctors with independent contractor (1099) side gig income. Knowing which plan to choose when you are the one responsible for picking it can be confusing without understanding the basics of each and who they benefit most, with several physicians reporting that different accountants had opposite suggestions. We’ve outlined independent contractor retirement account options as part of our side gig finances and self-employed income primer, but the specific discussion of a solo 401k vs a SEP IRA is a common question we see within our physician Facebook groups.
Below, we look closer at both of these retirement options, as well as other 401k options for entrepreneurs, covering the advantages and considerations for each to help physicians decide which is the best fit for their situation. Please note that we are not accountants, and you should talk this decision through with your accountant prior to making any decisions based on this article.
Disclosure/Disclaimer: Our content is for generalized educational purposes. While we try to ensure it is accurate and updated, we cannot guarantee it. Rules/laws can change frequently. We are not formal financial, legal, or tax professionals and do not provide individualized advice specific to your situation. You should consult these as appropriate and/or do your own due diligence before making decisions based on this page. To learn more, visit our disclaimers and disclosures.
Article Navigation
401k, Solo 401k, vs SEP IRA for Self Employed Physicians or Doctors with 1099 Income
The 401k, solo 401k, and SEP (Simplified Employee Pension) IRA offer tax advantages for investing toward retirement. Thanks to the SECURE Act 2.0, you may now have the added advantage of a Roth option for both a 401k and a SEP IRA, which can greatly benefit high-income earners such as physicians.
These plans work differently and have restrictions and rules depending on how many employees, if any, you have.
The Basics of 401k Plans
Most physicians are familiar with a 401k plan, as it has quickly become a more common option versus traditional pension plans companies used to frequently provide.
A 401k is a type of defined contribution plan. EmployEEs have the option to set aside pre-tax (traditional 401k) or post-tax (Roth 401k) dollars for retirement. The employER can also contribute on the employee’s behalf as well (pre-tax dollars into a traditional 401k) via a match, by contributing a percentage of an employee’s salary, or a combination of both.
The IRS imposes limits on how much employEEs and employERs can contribute annually to 401ks to limit the amount of tax-advantages you receive. For 2024, the limits are:
EmployEEs can contribute through elective deferrals up to $23,000 total across the employEE side of retirement accounts
Another $7,500 is allowed as catch-up contributions for individuals 50 and older
The annual total contribution limit for an individual plan is $69,000 (this includes the employEE’s + employER’s contributions, as well as others such as Mega Backdoor Roth contributions)
There are a few different types of 401k plans, such as a standard employee-sponsored 401k plan that can be used for businesses with any number of employees and the SIMPLE 401k, which is available to small businesses with 100 or fewer employees. For most self-employed physicians, however, the solo 401k plan is the most common option they consider versus a SEP IRA.
How the Solo 401k Plan Works
Solo 401k plans are a popular option for self-employed individuals or individuals with 1099 side hustle income who don’t have any employees (except a spouse or minor child). You may also see this plan referenced as an individual 401k or a one-participant 401k–they all refer to the same type of plan.
This plan operates similarly to a regular employer-sponsored plan, except you manage it just for yourself, or yourself and your spouse.
You cannot, however, have a solo 401k if you have any other eligible employees. In this case, you would need to set up a regular 401k, or choose another retirement plan option, such as the SEP IRA.
A note about employing your children: many physicians like the benefits of employing their children in their small business. This can still be possible with a solo 401k, but you must ensure the plan is properly set up with an age restriction on eligibility so they don’t qualify.
In addition to the annual contribution limits for 401k plans, there are additional contribution restrictions for solo 401ks:
EmployEE contributions up to 100% of “earned income”
EmployER contributions up to 20-25% of “compensation” (exact percentage depends on how you elect to be taxed - sole proprietor, LLC, S-corp etc)
Learn more about employee and employer solo 401k contribution limits.
Learn more about whether you need an LLC for your physician side gig or business.
Learn more about whether you should have your LLC taxed as an S corporation.
Solo 401k plans can be a great fit for self-employed physicians working as a 1099 physician, running a small telemedicine practice or private practice without any employees, and physicians with a side hustle.
Tax Advantages of a Solo 401k Plan
401k plans can have both an employER and employEE component, as outlined above. Depending on how it’s set up and whether you set up a plan that offers a Roth option, EmployEEs have the benefit of either:
Pre-tax contributions, which can lower your current year’s tax liability and allows tax-deferred growth
Post-tax contributions, which allows for tax-free growth and tax-free withdrawals in retirement
EmployERs can also receive tax deductions for contributions they make on behalf of their employees.
Learn more about how to choose between a Roth 401k versus traditional 401k.
Advantages of Choosing a Solo 401k Retirement Plan
There are several advantages to having a 401k retirement plan.
Has high contribution limits. 401ks can allow up to $69,000 a year in tax-advantaged retirement savings between the employEE and employER contributions. A solo 401k also allows up to 100% of your earned income if you haven’t maxed out your employEE contributions to a comparable retirement plan elsewhere and make less than 23k in 2024. For an additional income stream such as a side gig, this can be a huge benefit.
Does not count against a Backdoor Roth IRA. When assessing pre-tax funds for the Backdoor Roth IRA’s Pro Rata rule, the IRA is only interested in retirement funds within IRA accounts. As such, any pre-tax contributions made by you or your employer to your 401k does not count against you.
Catch-up contributions are available for late starters. Many doctors get a late start to saving for retirement because we spend so many years in training before our first attending jobs. If you find yourself late to investing for retirement, catch-up contributions can be an added benefit for additional savings.
Additional potential Roth options. Some 401k plans offer the ability to do a Mega Backdoor Roth, which can supercharge your tax-free income potential in retirement. 401k plans can also offer the ability to rollover and/or convert to a Roth IRA currently or in the future, though make sure you’re aware of the tax implications, especially if you have traditional 401k funds.
How a SEP IRA Plan Works
A SEP IRA is available for businesses of any size, so it is a potential option for physicians with side gig income, 1099 doctors, and small business owners.
A SEP IRA allows maximum contributions to the lessor of:
Up to 25% of each employee’s pay
$69,000 for 2024
Like a 401k, this can be a huge savings potential for high-income earners. Unlike 401k plans, however, with a SEP IRA, only the employER makes contributions. There is no employEE component.
If you are self-employed without employees or have side gig income, this isn’t an issue. But if you have employees, this can become much more expensive to fund. According to the IRS, if any of your employees meets the eligibility requirements of your plan, you must also contribute to their plans. There are nuances to this, but the essence is that everyone's contribution amount should be the same percentage of salary.
For years, only a traditional SEP IRA was available. As of 2023, changes now allow for Roth treatment of SEP contributions. Since this is still a relatively new ruling, we highly recommend consulting with a financial advisor or tax advisor to make sure you understand the IRS rules for this new election and treatment.
Like 401k plans, SEP IRAs have requirements for eligibility. For example, individuals under 21 years old, like children you’ve hired as employees, typically aren’t eligible, though you will want to be sure you review your specific plan’s eligibility requirements when setting it up.
Tax Advantages of a SEP IRA
Since employEEs cannot make contributions, they do not have the option of potentially lowering their current year’s taxes with elected deferral contributions. Like a 401k, however, they can still benefit from deferred taxes on growth or tax-free growth and withdrawals.
With a traditional SEP IRA plan, employER contributions are tax deductible. Speak with a financial advisor and/or tax advisor to understand employer tax advantages of the newer Roth SEP IRA option.
SEP IRAs and Implications for High-Income Earners Who Want to Do the Backdoor Roth
One important consideration regarding SEP IRAs is that since this is an IRA type plan, any traditional contributions can count against you for the IRS’s Pro Rata rule when it comes to a Backdoor Roth IRA.
We are huge proponents of the benefits of a Backdoor Roth IRA, so this can be a major disadvantage. The recent addition of the Roth SEP IRA option may help negate this downside, but it’s again important to speak to a professional to make sure you understand the implications before proceeding.
Advantages of Choosing a SEP IRA
Cheaper and less complicated to manage and maintain. SEP IRAs have less reporting requirements than small business 401ks, and can often be cheaper to administer and to fund contributions for than a 401k for a small business with employees. Additionally, while the solo 401k requires filing a form 5500 annually after your balance exceeds a certain threshold, the SEP IRA does not.
Contributions aren’t required. If you have a rough year where revenue is down and cash flow is tighter, SEP IRAs offer the flexibility of suspending contributions. 401ks may require you to continue to make contributions depending on how the plan is set up within the plan documents, regardless of business profitability. When you’re setting up the plan documents for a solo 401k, plan accordingly.
Contributions to a SEP IRA don’t count against 401k plan contributions. EmployEE annual contributions to 401k plans count across all plans you have. If you have an employer-sponsored 401k plan through an employer for a full-time physician position, nonclinical job, or other career, you may be highly restricted in the employEE contributions you can make to your small business or solo 401k. SEP IRA contributions, however, are counted separately from 401k contributions.
How to Choose Between a 401k and a SEP IRA
Choosing between a 401k versus a SEP IRA often comes down to the type of entrepreneurial endeavor you have, how much you’d like to contribute, and what your preferences for simplicity are.
If you have employees other than your spouse or children in either your self-employed business or side gig, note that the solo 401k is no longer an option. You would then be considering a 401k versus the SEP IRA. Also note that you will be required to make contributions for employees in both the 401k and SEP IRA options in accordance with non discrimination rules.
SEP IRAs can be a cost-effective way for small business owners with employees to save for retirement. They have fewer restrictions and lower administrative costs than running 401k plans with employees.
However, without employees, you may be able to contribute more to the solo 401k, particularly if you aren’t contributing to an employer sponsor planned elsewhere, because of the ability to contribute 100% of your side gig or self employed earnings up to the employee contribution max of $23,000 in 2024..
SEP IRAs also count against you for a Backdoor Roth IRA because of the violation of the pro rata rule, whereas a solo 401k will allow you to do both. Therefore, if you want to have that additional tax advantaged option, having to navigate the Pro Rata rule (now and in future years) can be a huge disadvantage to using a SEP IRA.
Solo 401k vs SEP IRA
Many of our physician members are looking for a retirement option for their 1099 physician income or side gig income. In this situation, we look specifically at the differences of a solo 401k vs SEP IRA for those physicians without employees other than their spouses or children.
For many self-employed physicians without other jobs where they can contribute to a 401k as an employee, the solo 401k will be the better option in the situation where you don’t have any other employees and don’t make enough money to max out the SEP IRA. This is because of the ability to contribute dollar for dollar up to the employEE contribution side max ($23,000 in 2024) before contributing the 20-25% of earned income to fill in the whole potential bucket of $69,000 in 2024. Additionally, the solo 401k will allow you to contribute to the backdoor Roth as well without worrying about the Pro Rata rule.
For those physicians with side gig 1099 income but with a primary W2 job that max out the employEE contribution in their 401k (or equivalent account) at their day jobs, the amount eligible for the contribution to the solo 401k versus the SEP IRA may not be substantially different. However, the solo 401k still allows you to continue to do the backdoor Roth without worrying about the pro rata rule.
One potential downside of the solo 401k is that after you reach a specific threshold of your balance in the account (currently $250,000 in 2024), you will have to file an annual form 5500 with the IRS. However, at this point, the tax savings of your compounding growth are usually worth the headache of a little extra paperwork.
Learn more about the solo 401k plan.
Conclusion
Which retirement plan is the best fit for you - a 401k plan versus a SEP IRA - comes down to what type of income/business you have, especially as it relates to employees, as well as how much money you make and where you can contribute the most. Your retirement goals can also factor in (i.e. how powerful is the Backdoor Roth IRA in your current situation?).
The solo 401k plan is an amazing opportunity for self-employed individuals in solo ventures without access to other 401k type plans, given its ability to contribute dollar for dollar on the employEE side. For those with employees, a SEP IRA can be a nice employee benefit, as well as a way to save additionally for retirement, for small business owners. There is no perfect solution across the board, but we hope the guidance above helps you determine the best route.
Please note that we are not accountants, and you should talk this decision through with your accountant prior to making any decisions based on this article.
Additional Resources for Self-Employed Doctors
Learn more about topics referenced above and related topics with:
Explore our financial advisors database for physicians for professional guidance from financial planners used to working with doctors who can help you decide the best fit if you aren’t sure.