What Is a Solo 401k and Do You Need One as an Independent Contractor

If you have any self-employment income as a physician, the solo 401k is one of the most powerful tax tools available to you. Here is how it works.

What Makes the Solo 401k Different

A solo 401k - also called an individual 401k or self-employed 401k - is a retirement plan designed for self-employed individuals with no full-time employees other than a spouse. For physicians who work as independent contractors, moonlight at outside facilities, or run a side practice, it is one of the most powerful tax-advantaged savings vehicles available. The contribution limits are significantly higher than a SEP-IRA in many situations, and the plan offers both traditional and Roth contribution options.

The key distinction is that in a solo 401k, you contribute as both the employee and the employer. As the employee, you can defer up to $23,500 in 2025 - the same limit as a regular 401k. As the employer, you can make an additional profit-sharing contribution of up to 25 percent of your net self-employment income. The combined limit for both contributions is $70,000 in 2025, or $77,500 if you are 50 or older and eligible for catch-up contributions.

Solo 401k vs SEP-IRA - Which Wins

The SEP-IRA is the other common retirement account for self-employed physicians. It is simpler to set up and administer, but it has a meaningful limitation: contributions are capped at 25 percent of net self-employment compensation, with no employee deferral component. For a physician with high self-employment income, a SEP-IRA can still generate a large contribution - but for those with lower net self-employment income, the solo 401k often allows a larger total contribution because of the employee deferral component.

For example, a physician with $80,000 in net self-employment income can contribute roughly $14,870 to a SEP-IRA (25 percent of net earnings after the self-employment tax deduction). Under a solo 401k, the same physician can contribute $23,500 as the employee deferral plus the same $14,870 employer contribution - a total of $38,370, more than double the SEP-IRA amount. The lower your self-employment income relative to the employee deferral limit, the larger the solo 401k advantage.

If you already maximize a 403b at your primary employer, the employee deferral limit is shared across all plans. You cannot contribute $23,500 to a 403b and another $23,500 to a solo 401k in the same year - the $23,500 limit applies to your total employee deferrals across all plans. However, the employer profit-sharing contribution to the solo 401k is separate and additive.

How to Set One Up

Opening a solo 401k requires that you have self-employment income and no full-time W-2 employees other than a spouse. The plan must be established by December 31 of the tax year for which you want to make contributions, though actual contributions can be made up until your tax filing deadline including extensions. Major brokerages - Fidelity, Vanguard, and Schwab - offer prototype solo 401k plans that are free to open and straightforward to administer for most physicians.

If you want to make Roth contributions within the solo 401k - which is not available in a SEP-IRA - confirm that your chosen provider supports it. Fidelity and Charles Schwab both offer Roth solo 401k options. Vanguard does not currently support the Roth option in their individual 401k. If a Roth solo 401k is important to your strategy, verify plan features before opening the account.

Who Should Have One

Any physician with consistent self-employment income should seriously evaluate the solo 401k. This includes independent contractors, locum tenens physicians, those with regular moonlighting income, and physicians who run a side consulting or medical-legal practice. Even if your primary employment income is fully sheltered in a 403b and 457b, self-employment income creates an additional contribution opportunity that can meaningfully accelerate tax-deferred wealth building.

The administrative burden of a solo 401k is modest - an annual IRS Form 5500-EZ is required once plan assets exceed $250,000, and basic recordkeeping is needed for contribution documentation. For most physicians, the tax savings justify the small amount of additional paperwork compared to simpler alternatives like the SEP-IRA.