Retirement Plans for Medical Practice Owners: SEP-IRA vs Solo 401(k) vs Cash Balance Plan

By Brian Giesecke, CPA/EA | Giesecke Advisory

SEP-IRA... Solo 401(k)... Cash Balance Plan... Defined Benefit...

There are a lot of retirement plan options for medical practice owners. And picking the wrong one can cost you tens of thousands of dollars in missed tax savings every single year.

Let's break down the options so you can find the best retirement plan for your practice.

What Is a SEP-IRA and Is It Right for Your Practice?

SEP stands for Simplified Employee Pension. And it really is simple.

How it works: Contribute up to 25% of net self-employment income or W-2 wages. The maximum SEP-IRA contribution for 2024 is $69,000 (per IRC Section 408(k)).

Pros:

• Dead simple — open one at Fidelity or Vanguard in 20 minutes
• No annual filings required
• Flexible contributions year to year

Cons:

• Lower contribution limits than other options
• If you have employees, you must contribute the same percentage for them
• No Roth option

Best for: Solo practitioners who want simplicity and aren't trying to maximize contributions.

How Does a Solo 401(k) Compare to a SEP-IRA?

Also called an Individual 401(k) or one-participant 401(k). Available if you have no full-time employees other than yourself and your spouse.

How it works: Contribute as both employer AND employee. Employee deferral up to $23,000 for 2024 ($30,500 if age 50+ due to the $7,500 catch-up provision). Employer contribution up to 25% of W-2 compensation. Combined maximum: $69,000 ($76,500 with catch-up contributions).

Pros:

• Higher contribution limits, especially at lower income levels
• Roth option available
• Loan provision — you can borrow from your own plan

Cons:

• Slightly more setup than a SEP
• Annual filing of Form 5500-EZ required once plan assets exceed $250,000
• Must convert if you hire full-time employees

Best for: Solo practitioners who want to maximize contributions and want Roth flexibility.

Solo 401(k) vs SEP-IRA: How Much More Can You Contribute?

At $100,000 in W-2 wages:

• SEP contribution: $25,000 (25%)
• Solo 401(k) contribution: $23,000 employee + $25,000 employer = $48,000

Nearly double the contribution with Solo 401(k). Same income.

What Is a Cash Balance Plan and Who Should Have One?

This is where things get serious. A Cash Balance Plan is a type of defined benefit pension plan (governed by IRC Section 401(a)) that can allow contributions of $150,000, $200,000, even $300,000+ per year.

How it works: Contribution limits depend on your age and a target retirement benefit. Older owners can contribute more because they have fewer years to accumulate.

Typical contributions by age:

• 40s: $100,000-$150,000/year
• 50s: $150,000-$250,000/year
• 60s: $200,000-$300,000+/year

Pros:

• Dramatically higher contribution limits
• Massive tax deductions for high earners
• Can be combined with a 401(k)

Cons:

• Requires annual actuarial certification
• Multi-year commitment to contribute
• More expensive to maintain ($2,000-$5,000/year)
• Employee contribution requirements

Best for: High-earning practice owners ($300,000+ income) willing to commit to ongoing contributions.

Real Example: How a Dermatologist Saved $100,000/Year With the Right Retirement Plan

A dermatologist, age 52, making $450,000 in profit. She had a SEP contributing about $60,000/year.

We set up a Cash Balance Plan combined with a Solo 401(k).

New annual contribution: $69,000 (401k) + $180,000 (Cash Balance) = $249,000.

Tax savings at ~40% marginal rate: roughly $100,000 per year.

Over ten years, that's $2.5 million sheltered from taxes.

How Should a Medical Practice Owner Choose a Retirement Plan?

Under $150,000 income, want simplicity: SEP-IRA or Solo 401(k)

$150,000-$300,000 income: Solo 401(k) is usually the sweet spot

$300,000+ income: Look seriously at Cash Balance

50+ and want to accelerate: Defined Benefit or Cash Balance plans allow much higher contributions

Key Takeaways

• SEP-IRAs cap at $69,000 for 2024 and are best for solo practitioners who value simplicity over maximum contributions.
• Solo 401(k) plans allow nearly double the contribution of a SEP at the same income level — $48,000 vs $25,000 at $100,000 in W-2 wages — and offer a Roth option.
• Cash Balance Plans can shelter $150,000-$300,000+ per year, making them the most powerful tax reduction tool for high-earning practice owners ($300,000+ income).
• Combining a Solo 401(k) with a Cash Balance Plan can shelter $200,000-$350,000+ annually — reducing tax liability by $80,000-$140,000 per year at a 40% marginal rate.
• The wrong retirement plan is the most expensive mistake most practice owners don't know they're making. A simple plan comparison can reveal five- and six-figure annual savings.

Frequently Asked Questions

Can I have both a Solo 401(k) and a Cash Balance Plan?

Yes. In fact, this is one of the most effective strategies for high-earning medical practice owners. You maximize the Solo 401(k) first (up to $69,000 for 2024), then layer a Cash Balance Plan on top for an additional $100,000-$250,000+ in tax-deductible contributions depending on your age.

What happens to my Cash Balance Plan if I sell my practice?

You can roll the Cash Balance Plan balance into an IRA, just like a 401(k). The funds remain tax-deferred. However, you should plan the transition carefully — Cash Balance Plans require ongoing actuarial commitments, so timing the wind-down with a practice sale requires advance planning.

Your Next Step

Look at your current retirement plan. How much are you contributing?

Then ask: Is this the maximum I could be contributing? Is this the best vehicle for my situation?

If you have a SEP and you're making $300,000... you're probably leaving money on the table.