A physician business owner wants to know which of many retirement savings account options available today makes the most sense for self-employed individuals.
Q: I own my own practice and with all the different retirement account options available today I'm wondering whether saving through a SEP IRA is still the best option for my money. What do you recommend?
A: Self-employed physicians can be overwhelmed by the confusing array of retirement plans available. The amount a doctor can put into a retirement kitty depends on the plan and setting up a retirement plan can range from simple to extremely complex.
A relatively new option is the solo 401(k), which is a lot like the 401(k) plan that you’d have if you were an employee, with a couple of important exceptions. With a solo 401(k), for example, you can choose between a traditional plan and a Roth 401(k). The main advantage of the solo 401(k) is that you can usually put away more money than with other options.
This year, self-employed physicians can put in up to 100 percent of income from their practices into solo 401(k)s, up to $16,500 (or $22,000 if you’re over 50), plus 20 percent of net profits, up to a maximum of $49,000. This is far more than individuals are allowed to put into a Simple IRA and, in many cases, more than can be contributed to a SEP IRA. In addition, there are no income restrictions on your contributions to a Roth 401(k), as there would be with a Roth IRA. (Note: Contributions to a Roth 401(k) are made after tax, while money you put into a regular solo 401(k) plan is tax-deferred until you take it out.)
Setting up a solo 401(k) might cost less than you’d think. Many well-known financial services firms, such as Fidelity Investments, Charles Schwab, Vanguard Group, and T. Rowe Price Group, will do the job for a reasonable price. The most common charges are set-up fees and annual administration fees, along with the usual mutual-fund expenses. Retirement planners caution that management fees for a solo 401(k) can be higher than for a SEP IRA, so you need to shop around. As a rule of thumb, the more you can put into your retirement plan, the more sense a solo 401(k) plan makes.