Retirement Savings Options for Doctors that Have Their Own Practice

Opening and successfully operating your own practice is an incredible feat you should be proud of. As you continue navigating the ups and downs of business ownership, it’s essential to keep your financial future at the forefront (though we know this can be hard to do when you’re pulled in so many different directions). 

Without the robust resources and framework of a hospital network to fall back on, it’s up to you and your leadership team to research, select, open, and manage a retirement savings plan (for yourself and your employees, if applicable). 

We understand this is no easy feat, so we built this guide to help you navigate your options and select what best fits your needs today and in the future as you approach retirement.

Option #1: Solo 401(k)

If you are a one-person show (aka a solo practitioner), the IRS does offer one-participant 401(k) plans called solo 401(k)s. This option is only available to business owners with no employees (except a spouse).

The high contribution limit is the most compelling benefit of a solo 401(k). In 2024, solo 401(k) participants can contribute up to $69,000 (plus an additional $7,500 for those 50 and older). Keep in mind this limit includes both employer and employee contributions. Employee contributions (known as elective deferrals) cannot exceed $23,000.¹ 

Like other types of 401(k)s, a solo 401(k) can come in two options: a traditional or Roth plan. With a traditional plan, anything you contribute as an employee will be taken off your annual taxable income.

The funds will grow tax-deferred until you begin withdrawing in retirement. With a Roth solo 401(k), your contributions are already taxed (meaning they won’t lower your taxable income for the year. The tradeoff, however, is that you can enjoy tax-free retirement income on qualified distributions.

Remember that the money put into your solo 401(k) is generally inaccessible until age 59.5. If you try to take distributions early, they may be subject to hefty tax penalties—in addition to any standard tax liability the distributions may incur.

Option #2: Simplified Employee Pension IRA (SEP IRA)

A SEP IRA is another common option for solo practitioners, though it can be used by small business owners with a few employees. The reason is that employers must contribute to the SEP-IRA on every eligible participant’s behalf, and those contributions have to be the same percentage of the employee’s compensation as your own.

For example, if you want to contribute 20% of your compensation (the limit is 25% or $69,000, whichever is less) but you have 10 employees, you will be required to contribute 20% of their compensation to each of their plans as well.² 

Unlike solo 401(k)s, employees don’t contribute to the plan, only the employer does. Some other limitations include:

• No Roth version (meaning all contributions are made with pre-tax dollars, and distributions will be taxable).
• There are no catch-up contributions (these are usually applicable to employees 50 and older participating in defined contribution plans, like 401(k)s).
• Participants must start taking required minimum distributions (RMDs) at age 73 (if they aren’t already).
• Early distributions before age 59.5 may be subject to a 10% tax penalty (on top of the ordinary income tax due).

Also, keep in mind that anything you contribute as an employer to your SEP IRA or an employee’s account is tax deductible from the business. 

Who Are Eligible Participants?

We mentioned earlier that if you contribute to your SEP IRA, you must contribute an equal percentage to all eligible participants’ accounts.

Eligible participants include employees who meet the following criteria:² 

• Someone who has worked at your business for at least three of the past five years
• Is 21 or older
• Made at least $750 in 2024

If any employee meets all three criteria, you must contribute to their account (in the years you choose to contribute to yours). 

Option #3: Savings Incentive Match Plan for Employees (SIMPLE IRA)

You can open a SIMPLE IRA if your practice has less than 100 employees. This plan carries characteristics similar to those of a traditional SEP IRA.

While employer contributions are mandatory, employees also have the option to contribute as well (which isn’t the case with SEP IRAs). Those employee contributions are tax-deferred (again, meaning you won’t pay income tax until withdrawals are taken in retirement). Like a traditional IRA, you can begin withdrawing at age 59.5.

Employers can determine their contribution to employee accounts using one of two methods. Either they can make matching contributions of an employee’s salary up to 3%, or they can make nonelective contributions equal to 2% of the salary’s compensation (based on salaries not exceeding $345,000 for 2024). New for 2024, employers can make additional contributions, as long as it doesn’t exceed $5,000 or 10% of the employee’s compensation (whichever is less).³ 

One major drawback of SIMPLE IRAs is their limited contribution limits (as compared to 401(k)s). In 2024, for example, the employee contribution limit is $16,000, or $19,500 for employees over 50.³  

Option #4: Defined Benefit Plan

The most common type of defined benefit plan is a pension plan, and small businesses (like your practice) can establish one for retirement. 

Unlike defined contribution plans (like 401(k))s), this type of plan doesn’t have required minimum distributions or withdrawal limits. Instead, you become eligible to begin receiving payouts from the plan at a certain age—and these payouts can come in the form of a lump sum or monthly payments (or sometimes a combination of both).

With a pension plan, you and your employees will know what you’re entitled to in payouts based on a specific formula (which can depend on years of service, salary, etc.). The business’s responsible for paying that amount when the time comes—whether the investments have performed well or not. Because of this, a pension plan’s payouts are not based on how much is contributed but on what an employee is entitled to based on the formula.

Option #5: Cash Balance Plan

A cash balance plan is another defined benefit plan, though it has some characteristics similar to a 401(k).

Unlike a traditional pension plan, the benefits paid out in a cash balance plan are based on the plan participant’s account balance. Employees do not contribute to the plan, only employers do. They’ll commit to contributing a certain percentage of your salary plus interest.

Once you retire, you’ll be eligible to take a lump sum or monthly payments (like a traditional defined benefits plan). Remember that anything you receive from your cash balance plan is taxable.

Weighing Your Retirement Plan Options?

When selecting a retirement plan for your practice, it’s essential to keep the tax benefits and implications in mind. Do you want a tax-deferred plan that will save you money today but increase your taxable income in the future? Or is it better to set aside after-tax funds and grow your tax-free retirement income bucket?

Most doctors will need to draw their retirement income from multiple sources—meaning you may want to offer more than one savings option for your firm. 

If you’d like to review the options shared above and discuss your own retirement savings strategy, don’t hesitate to reach out to our team today to get started.

^Sources:

^{1One-participant 401(k) plans}

^{2Simplified Employee Pension plan (SEP)}

^{3SIMPLE IRA Plan}