Independent contractor physicians may be masters of their own ship when it comes to decisions around financial planning and retirement—but that control comes with a lot of decisions to make.
Some greet this responsibility with excitement, relishing the task of planning every detail of their financial life. But not everyone has the time and bandwidth to maximize every opportunity for wealth creation over time.
Note: if you are an independent contractor physician with questions about planning for retirement, our trusted partner GenFi specializes in financial planning for independent contractor physicians. Schedule a complimentary consult with founding partner Ben Yin.
When it comes to finding the best retirement plan, physician contractors generally fall into three tiers of sophistication: 1.0, 2.0, and 3.0. These tiers aren’t necessarily better or worse, but they do get increasingly more complex. Choosing which one you want to pursue will depend on you and your family’s particular situation.
Let’s explore each and how they can help you save effectively while minimizing your tax burden.
Retirement Plan 1.0: SEP IRA
A Simplified Employee Pension Individual Retirement Account (SEP IRA) is often the go-to retirement plan for independent contractors due to its simplicity and ease of setup. However, for high-income earners like physicians, it has significant limitations.
How does a SEP IRA work?
Compared to other retirement plans, SEP IRAs are relatively easy to set up and manage, making them an attractive option for physicians who may not have the time or desire to deal with complex financial arrangements. Assuming you’re utilizing an LLC (taxed as an S-corp) and paying yourself wages, you can contribute up to 25% of those wages to your SEP IRA, with a maximum limit of $70,000 for 2025.
Complications with a SEP IRA
It’s difficult to max out your SEP IRA contributions while minimizing payroll taxes. Many independent contractor physicians reduce their W-2 payroll to lower FICA tax but don’t realize this also brings down the amount they can contribute to their SEP IRAs, which can be counterproductive and reduce potential retirement savings.
For example, A physician earning $400,000 annually but taking only 30% of that amount ($120,000) as W-2 income would have a contribution limit of 25% of the W-2 income, which in this case is $30,000. Although $30,000 certainly isn’t nothing, it is less than half of the maximum contribution. You could be putting away much more, but are disincentivized from doing so because of the FICA tax.
The SEP IRA’s simplicity and tax benefits make it a popular choice and a good starting point, but it’s worth exploring other retirement plans to find the one that truly fits your needs. One of the key features of a SEP IRA is the tax deducibility of the contributions, however, it’s worth noting a Roth SEP IRA is now available (no deduction when contributing but it’s income tax-free when accessed during retirement)
Retirement Plan 2.0: Solo 401(k)
A Solo 401(k) offers independent contractor physicians significant advantages by enabling contributions as both the employee and the employer. It provides greater flexibility and higher contribution limits than a SEP IRA, making it an attractive option for physicians seeking to maximize their retirement savings without significantly increasing their payroll tax.
How does a Solo 401(k) work?
A Solo 401(k) offers independent contractor physicians significant advantages by enabling contributions through three distinct “buckets”:
- Employee contributions: You can contribute up to $23,500 for 2025 as a Pre-tax or Roth 401(k) contribution
- Employer contributions: Your LLC can contribute up to 25% of your W-2 earnings as pre-tax profit-sharing
- Voluntary after-tax contributions: A lesser-known feature that allows you to contribute additional funds up to the total annual limit
The maximum total contribution limit for 2025 is $70,000 ($69,000 for 2024). For those over 50, there’s an additional catch-up contribution of $7,500. Brand new for 2025, for those ages 60-63, the “super catch-up” contribution is $11,250 (instead of the standard $7,500).
The Power of Voluntary After-Tax Contributions
Here’s where things get interesting. Let’s say you’re under age 50 and pay yourself a $100,000 W-2 salary through your LLC. You could structure your contributions like this:
- $23,500 as employee contribution (Roth 401(k))
- $25,000 as employer contribution (25% of your W-2 wages, pre-tax)
- $21,500 as voluntary after-tax contribution
That after-tax contribution can then be converted to your Roth 401(k)—a strategy known as the “mega backdoor Roth.” Unlike similar conversions with IRAs, the pro-rata rule doesn’t apply here, making it a powerful tool for building tax-free retirement savings.
Important note: Your 401(k) plan documents must specifically allow for voluntary after-tax contributions and in-plan Roth conversions. This isn’t a standard feature in all plans, so make sure to check with your plan provider.
The Tax Efficiency Sweet Spot
If you’re wondering whether to increase your W-2 income to maximize contributions, here’s our take: it usually doesn’t make sense. Here’s why:
If you increase your W-2 salary to $186,000 maximize traditional contributions, you’ll pay about $11,000 more in payroll taxes compared to a $100,000 W-2 income. That’s a steep price to pay just to contribute an additional $21,500 to your retirement account—especially since you’ll eventually pay taxes on those withdrawals anyway.
Instead, consider the strategy outlined above: maintain a lower W-2 salary to minimize payroll taxes, then use voluntary after-tax contributions to reach the maximum. You’ll save on immediate payroll taxes while still maximizing your retirement savings, with a significant portion in Roth accounts for tax-free growth.
Despite the extra administrative work (and some extra expenses (deductible)), the benefits of a Solo 401(k) make it a compelling option for independent contractor physicians. By strategically using all three types of contributions—employee, employer, and voluntary after-tax—you can build substantial retirement savings while maintaining tax efficiency.
Retirement Plan 3.0: Defined Benefit Plan
For high-income earners looking to save aggressively for retirement, a Defined Benefit plan offers unmatched contribution limits and tax advantages. Defined Benefit plans are self-funded pension plans that guarantee a specific monthly benefit upon retirement. Although they’re less common and more expensive to administer, they can be an excellent option for some high-earning physicians.
How does a Defined Benefit plan work?
With a Defined Benefit plan, you determine the retirement benefit you wish to receive and calculate the annual contributions needed to meet that goal.
For example, if you want to receive $10,000 a month after age 65, you are defining the benefits that you want. A Defined Benefit plan lets you contribute much more than SEP IRAs and Solo 401(k)s, potentially over $200,000 annually, depending on your income and desired retirement benefit. In addition, contributions are tax-deductible.
These plans are particularly suitable for physicians around the age of 45 or older who are earning too much to qualify for the Qualified Business Income (QBI) deduction under section 199A. Adding a Defined Benefit plan along with your Solo 401(k) might bring your taxable income under the limit and allow you to qualify.
Defined Benefit plans can also be combined with other retirement plans. By using multiple plans, you can maximize your contributions. This allows for greater flexibility and the potential to defer even more income from taxes…all while keeping your W-2 income low and thus, your payroll taxes low.
Complications with a Defined Benefit Plan
The main challenge of a Defined Benefit plan is the annual recalculation required to meet pension obligations. This process ensures that the plan is on track to provide the promised benefits, but it adds a layer of complexity and requires ongoing actuarial assessments. This is why the administrative costs for maintaining a Defined Benefit plan are higher compared to simpler plans like SEP IRAs and Solo 401(k)s.
Often, the significant tax savings and ability to contribute more to your retirement account will offset the higher costs. While the annual recalculations and administrative requirements are more complicated, a Defined Benefit plan can help maximize your retirement savings and tax benefits.
Choose your future (and get some advice)
Ultimately, the best retirement plan for physician contractors is not one-size-fits-all. It depends on your age, bandwidth, family situation, goals, and comfort level. That’s why personalized financial advice is crucial to crafting a retirement strategy that meets your unique needs.
We encourage you to seek professional financial advice to tailor a retirement plan that aligns with your career, income, and future aspirations. If you want to find out more about how to best save for retirement, reach out and schedule a free consultation with GenFi.