Let's face it, we all like having money and would like to continue having some sort of income in retirement. The best kind of retirement plan different between training and starting your own practice. There are also some rule to be aware of before you open your plan. There are a lot of resources out there about different retirement plans, so we'll just touch on some actionable material that ought to help streamline your decision-making process. Disclaimer: I am in no way a financial advisor/finance professional.
During Training/Before Self-Employment:
If you can, definitely participate in whatever retirement plan is available to you at least up to the limits of your employer match. Usually this is somewhere around 2-4%. The match is essentially free money for you when it vests (typically around 2-3 years depending on the plan). Beyond that, contributing to a Roth IRA is super helpful during this time. A Roth IRA lets you put in post-tax dollars (at a low tax rate as a trainee) then distribute it to yourself in your retirement tax-free. The tax savings here can be substantial because you don't have to pay taxes on the gains you make in the Roth IRA. Far more information can be found in a very easy-to-read format can be found on the White Coat Investor website. They have a nice step-by-step guide to how to do a back door Roth IRA that is super helpful as well.
Self-Employment:
The IRS has a guide with some good information here. There are essentially 4 options that aren't too complicated (below). There are others as well (e.g. defined benefit plans, profit-sharing plans, and money purchase plans), but then tend to be complicated. It's worth looking at all your options to make sure you pick the best one for you.
- Individual 401(k)
- Simplified Employee Pension plan (SEP-IRA)
- Savings Incentive Match Plan for Employees (SIMPLE-IRA)
- 401(k) Plan
Individual 401(k)
Only available to those who have no employees other than a spouse. This it is essentially the same as other 401(k) plans, however there is no discrimination testing because you don't have any other employees. This isn't going to work very well for most solo practitioners since we tend to need at least 1-3 employees who are not a spouse. Annual IRS filings are required.
Simplified Employee Pension- plan (SEP-IRA)
Good for businesses with a few employees. The employer contributes everything with no employee contributions. This means that your retirement contributions won't be subject to payroll taxes, and the contributions are tax-deductible. However you have to contribute the same for all eligible employees (up to 25% of the employee's compensation or $61,000 (for 2022), whichever is less). Eligible employees are typically those who are 21+, earn at least $650/year, and have worked for you in at least 3 of the past 5 years. No annual IRS filing requirement.
Savings Incentive Match Plan for Employees (SIMPLE-IRA)
For business with 100 or fewer employees. Employee contributions are up to 100% of compensation or $20,500 (2022), whichever is less. Employer contributions are the same for every employee: 3% match or 2% non-elective contribution. Eligible employees must have earned at least $5,000 in any preceding 2 years and be expected to earn at least $5,000 in the current year. No annual IRS filing requirement.
401(k) Plan
The same 401(k) you're used to from being employed. It's for companies with up to $50M in assets. Employees can contribute up to $20,500 (2022) and no more than 100% of compensation. Employers can contribute by matching employee contributions, making a predetermined fixed contribution, or profit sharing contributions. The total limit for employee plus employer contributions is $61,000 (2022). There are typically annual fees and annual IRS filing requirements associated with this plan. Crucially, this plan has to meet nondiscrimination test to ensure that key employees (e.g. practice owners) and other highly compensated employees aren't favored. There is a really nice example of how these tests work on
Guideline. The bottom line is that having a financial professional is going to be very helpful to set this one up and ensure compliance with the legal requirements on an annual basis.
Putting It All Together
The way I see it, your choice of retirement account for your solo practice is fundamentally based on your philosophy. If you want to maximize employer contributions, go with the SEP-IRA. This is an excellent plan when you're starting out. You can put in the maximum (or up to 25% of your compensation) using exclusively employer contributions, not have to defer any of your salary, and -the contributions are tax deductible. Your take home pay stays the same while filling your retirement account. Crucially, you must provide the same for all eligible employees (see above). It's entirely possible if you have a lot of employee turnover, that you may go several years before you have eligible employees.
The SIMPLE-IRA is another excellent choice. A 2% or 3% employer match is pretty decent when you're paying yourself a reasonable salary according to the IRS. However, most of the contributions will come to you in the form of deferred compensation. This means that your take home pay will decrease while you fill up your retirement contributions. The same nondiscrimination rules apply for eligible employees.
It is also possible to change from one plan to another. The IRS has a
handy chart to help you figure out what kinds of accounts can be rolled over into each other. I know of a few people who started with a SEP-IRA then changed to a SIMPLE-IRA after a few years when they had a fair number of long-term employees.
Where Do I Open My Retirement Account?
Pretty much every large financial institution that offers retirement accounts will be more than happy to have you open another account with them. The key features to look at are the fees, how much help you'll get, and what investments are available within the plan. After looking through several options, I think Vanguard and Fidelity offer a good mix of low cost, good help, and good investment vehicles.
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