Best Way for Physicians to Contribute to Retirement Plans

"What is the best way for a physician business owners to contribute to retirement plans?"

Traditional or Roth IRA

If you don't have any type of business corporate retirement plan, you have the options of contributing to a traditional or Roth IRA. Most physicians are probably going to make too much money to make a traditional IRA contribution. If you make over $122,000 and you're single, or $193,000 and you're married, then you start phasing out of being able to contribute to a traditional IRA. The Roth IRA also has the same limitations except there's a backdoor to Roth IRAs where you can contribute to a non-deductible IRA and convert it to a Roth IRA. The IRS actually lifted the income limits on the conversion. This means there is still a way to fund, you know, $6,000 if you're under 50, and $7,000 if you're older to a Roth IRA.  


If the physician has a an S corporation set up, or partnership for business, and they're the only employee in that entity, then a SEP IRA becomes really attractive. A SEP IRA allows you to put up to 25% of your business income, or if you're a S Corporation up to 20%, of their W-2 wages into a retirement plan. You can fund what the IRS has set as the employee limit, which is $19,500, and the combined limit for the employee and the employer side which gets you up to $56,000. This can be a really attractive way for a physician if they don't have any other employees to fully fund their retirement.  

Solo 401k

Another option that's gaining some popularity in the same scenario, where there's only one employee in an S corporation, is a solo 401K. Since the physician is an employee of their S corporation and they can only put 20% of your W-2 wages, then you've got to pay pretty significant wages on the W2 to fully fund the SEP IRA.  The solo 401K allows contributions to be done similar to a normal 401K where the physician as the employee can actually fund up to $19,500 out of their paycheck and then the employer can make the employer contribution.  On a solo 401K you can actually pay yourself a lot lower W-2 wage which helps you take advantage of the Social Security and Medicare savings that come along with the S-Corp. It's really going to depend on what your salary is to decide which one of those plans benefits you the most.

Simple IRA

Another option if the physician has an S corporation or partnership LLC setup that has multiple employees, then the SEP IRA and solo 401K lose some of their attractiveness. In this case a simple IRA is a great plan. It's very low cost. The difference in a simple IRA and a traditional 401k is that in a 401k the employer establishes a plan, finds a trustee that holds the money, and employees can make investment decisions, but the trustee is actually doing the investing for the plan. This can be quite costly to set up.  In a simple IRA, the employees actually find their own financial advisor that will maintain their plan. All the employer has to do is match 3%. If the employee puts in 3%, the employer puts in 3%. If the employee puts 5% then the employer puts 4%.  So the max that an employer would have to contribute would be 4%. It's a very low cost plan. Right now employee contributions are capped at $13,500, so you don't quite get to put as much money away in a simple IRA as you do in the 401K.

It's important to talk to your accountant about how your corporation is structured or your entity is structured, how many employees you have, and how much money you're looking to put into the plan. Then work back into the plan that fits you best.

If you have any questions about your business, text them to me at 501-762-0116.