Evaluating IRA Options

Many financial professionals still believe a SEP IRA is the best retirement account for self-employed people. Let me tell you why this is outdated advice and why a Solo 401(k) is better... >> 1. Higher contributions The solo 401(k) and SEP IRA have a $70k limit in 2025. However, a solo 401(k) allows you to contribute a higher percentage of income. This is becuase you can contribute as the employee (you) and the employer (also you). Example... Let's say you earn $150k as a 1099 contractor or single-member LLC. Here is how much you can contribute: Solo k: $51,300 ($23.5k as the employee + 20% of adjusted earnings as the employer) SEP IRA: $27,800 (SEP IRAs only allow for the employer side contribution) >> 2. Roth options With a solo k, you can make Roth contributions as the "employee" up to $23,500 SEP IRAs do not have a Roth feature. However, this is supposed to be rolling out soon (but it might still be suboptimal because of the tax reporting!) >> 3. Opens the backdoor Roth For higher earners that want to use the backdoor Roth strategy, SEP IRAs are part of the "pro rata" equation. In other words, you can't do the backdoor Roth w/ a SEP. A solo 401(k) can remove any IRAs, so you can cleanly do the backdoor Roth. >> 4. Mega backdoor Roth A solo k can allow for after-tax contributions, allowing you to get up to $70k into a Roth account! A SEP IRA only allows for pre-tax contributions. However, you can do Roth conversions with a SEP IRA. >> 5. Loans With a solo k, you can access the account via loans. This can be huge for self-employed business owners who might need capital in a pinch. It's not a preferable option, but it's there for some flexibility. No loans with a SEP. >> 6. Catch up contributions Once you turn age 50, you can make "catch-up" contributions to a solo 401k. Age 50-59 or 64+: +$7,500 Age 60-63: +$11,250 A SEP IRA does not allow for these additional catch up contributions. >> 7. Maximize your 20% QBI deduction With the flexibility of different contribution types -- pre-tax, Roth, or after-tax, the solo 401k can help you maximize your QBI deduction (depending on your total income). With a SEP IRA, you're stuck with pre-tax contributions, which can limit your QBI deduction. There are very few people that get this one right. It might be one of the biggest perks of the solo 401k. In the end, the most important factor is actually using one of these accounts to invest tax-advantaged. However, in my experience, the solo 401k offers much greater flexibility for solo business owners and 1099 contractors.

Working with an anesthesiologist who made ~$400k in 1099 income in 2025. Expects a similar income in 2026. Lives in Tennesee. Files single. He's received all sorts of conflicting opinions from CPAs on SEP IRAs, solo 401ks, S corp, no S corp, can't contribute to a Roth, can contribute to a Roth, etc so he reached out. Here's a line item of what we've talked about: 1 - LLC and whether to elect to be taxed as an S corp or not. On paper, he's a perfect fit for S corp. AI would tell him yes. Internet advice would tell him yes. But he lives in Tennesee. Any S corp savings he'd get he'd give up in new Tennesee state excise taxes. Here are the #s if he S corp'd his LLC with a $200K reasonable salary. No S corp = $35,115 self-employment tax, $98,594 federal income tax, and $0 state income tax. Total of $133,709 in tax on $400K of sole prop earnings. S corp = $28,678 payroll tax, $99,721 of federal income tax, and $8,818 of state excise tax. Total tax = $137,717 vs. $133,709 as a sole prop. Net loss of $4K and this doesn't include costs of running payroll, paying for a separate business filing fee, and admin burden of being an S corp (accountable plan for home office, vehicle, etc). Lots of lessons to be learned in this 2 - Retirement plan options. Both 2025 and 2026. A SEP IRA could be opened to do a $70K tax deduction on 2025 taxes to save him roughly $24,500 on 2025 taxes but he doesn't love the idea of locking up funds till 59.5. A solo 401k could be used to do this exact same thing ($70K tax deduction on 2025 taxes) but it wouldn't block a backdoor Roth for him moving forward so if this is what he wanted ($70K tax deduction on 2025 taxes) I'd still point him toward a solo 401k over a SEP IRA. Solo 401k reduces QBI deduction less as well but that's a bit more nuanced than this post needs 3 - Assuming he disregards the $70K tax deduction since he doesn't want to lock up funds, he can use his solo 401K plan to get $70K into his Roth IRA for the 2025 tax year. Then use it to get $72K in his Roth IRA for the 2026 tax year. The #s get crazy quick but he loves this path since it gives him full access to his principal contribution ($70K for 2025, $72K for 2026) anytime tax-free and penalty-free and then all gains grow tax-free. Win win and one of the rare cases where tax benefits exist and liquidity exist. 4 - Max out HSA. He already has a high deductible health plan and is doing this so nothing to change here. 5 - Retroactive backdoor Roth for the 2025 tax year and then do a backdoor Roth for 2026. Since he is not doing a SEP IRA, this is another easy win for him. Already taxed dollars go in and then the account grows tax-free. $7K for 2025. $7.5k for 2026 Then we can layer in a handful of other things but some really cool dialogue that he was good with me sharing

💡 Roth IRA vs. Traditional IRA: What's the Difference? 💡 When it comes to saving for retirement, IRAs (Individual Retirement Accounts) are a powerful tool. But if you're deciding between a Roth IRA and a Traditional IRA, it’s important to understand the key differences—and how each option impacts your taxes and future retirement savings. 🏦 Here’s a quick breakdown: A. Traditional IRA: - Tax Benefits: Contributions are tax-deductible in the year you make them, which can lower your taxable income. - Tax on Withdrawals: When you withdraw in retirement, your money is taxed as ordinary income. - Required Minimum Distributions (RMDs): You must begin taking RMDs at age 73. - Eligibility: Contributions are limited by income, but you can contribute at any age as long as you have earned income. B. Roth IRA: - Tax Benefits: Contributions are made with after-tax dollars (no immediate tax deduction). - Tax-Free Withdrawals: Qualified withdrawals in retirement are tax-free (including earnings). - No RMDs: You are not required to take RMDs during your lifetime. Eligibility: Contributions are limited by income; higher earners may not be eligible to contribute directly. Key Decision Factors: 1) Tax Strategy: If you expect to be in a higher tax bracket in retirement, a Roth IRA might be beneficial for tax-free withdrawals. On the other hand, if you want to reduce your taxable income now, a Traditional IRA might be the way to go. 2) Withdrawal Flexibility: A Roth IRA provides tax-free access to your contributions anytime (subject to conditions), making it more flexible if you need funds before retirement. **The due date to fund an IRA for 2024 is April 15th, so don't delay!** 💡 Tip: Consider talking to a financial advisor to determine which IRA is best suited for your long-term financial goals! #RetirementPlanning #RothIRA #TraditionalIRA #TaxPlanning #Investing #FinancialTips

Let's talk about: The Retirement Strategy many Physicians don't hear talk about often! In my speaking engagements, I’m often asked how physicians can invest for their future. I always enjoy sharing options they may not have considered and it’s often a surprise when I talk about the power of investing through a Self-Directed IRA (SDIRA). Physicians are trained to think critically and plan carefully. But when it comes to retirement, most are guided toward the same options:   Max out a 401(k) Contribute to an IRA Rely on the market That approach can work, but it isn’t the only one. A Self-Directed IRA (SDIRA) gives physicians the opportunity to invest retirement funds beyond stocks and bonds. This can include: Real estate, including medical office properties Private equity Renewable energy The benefit is flexibility. You can stay within a tax-advantaged structure while choosing investments that may better align with your goals and risk tolerance. It’s not a fit for everyone. For some, though, it is a valuable way to diversify beyond traditional assets. If you are exploring options that go beyond conventional retirement planning, I’m happy to share what I’ve learned!