The retirement plan options available to self-employed physicians and other small business owners have historically been very limited. As a result of some welcome changes, the menu of available retirement plans has increased, giving physicians greater flexibility.
Solo 401(k) Plans
If you are self-employed, a Solo 401(k) is an excellent option for saving for retirement. As the business owner, you are entitled to contribute both as an employee and the employer. Employee contributions may be made on a pre-tax or Roth basis, providing access to different tax-advantaged options. A self-employed physician, as their own employee, may defer 100% of their compensation up to $19,000 for the 2019 tax year ($25,000 for employees age 50 or older) and $19,500 for the 2020 tax year ($25,500 for employees age 50 or older). Additionally, if your spouse is an employee of the business, they can contribute to the plan as well. As the employer of your own business, you may make an additional employer contribution up to 25% of compensation. However, combined employee and employer contributions cannot exceed $56,000 for the 2019 tax year and $57,000 for the 2020 tax year. Employer contributions are generally deductible as a business expense. The Solo 401(k) is subject to reporting requirements once the total account balance exceeds $250,000.
Simplified Employee Pension (SEP) IRA
Another option for someone who is self-employed is a SEP. If you are self-employed with no employees, a SEP allows employer contributions equal to 20% of your net income up to a maximum of $56,000 in 2019 and $57,000 in 2020. There is no option to also contribute as an employee. However, this more “simplified” plan is generally exempt from the reporting requirements of other qualified retirement plans like a Solo 401(k) and may be easier to manage. Net income, which determines how much can be contributed into the SEP, is defined as the net profit from IRS Schedule C reduced by the deductible self-employment tax. Contributions to the SEP are deductible as a business expense. If you have employees, the rules for SEPs become much more complicated, and we recommend you speak with a financial professional to determine if a SEP is still an appropriate option for you.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
A SIMPLE is only available to employers with 100 or fewer employees. Like SEPs, SIMPLEs are exempt from most reporting rules. SIMPLEs are generally most appropriate for someone who is self-employed but does have a small number of employees. As the employer, you have two options when contributing to the plan. Option one, make a dollar for dollar match of employee contributions up to 3% (this can be reduced to 1% in any 2 out of 5 years). Option two, contribute a safe-harbor 2% of the employee’s compensation. Employee compensation is subject to the IRS compensation limit of $280,000 in 2019 and $285,000 in 2020. These employer contributions are required every year and they are deductible. Employees in the plan may contribute up to $13,000 in 2019 ($16,000 if over age 50) and $13,500 in 2020 ($16,500 if over age 50).
An additional option includes a Keogh Plan which combines a defined contribution plan and a defined benefit pension plan. However, due to some tax law changes, these have largely been replaced by SEP IRAs.
Overall, there are retirement options available for self-employed physicians. However, the nuances between the options can be complicated. We recommend you speak with your financial advisor to determine which plan is best for you.
Jeff Witz, CFP® welcomes readers’ questions. He can be reached at 800-883-8555 or at firstname.lastname@example.org.
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