Wealth Building · 12 min read
Solo 401(k) vs SEP-IRA for Physician Side Income
The 1099 retirement space most physicians leave unopened — and the plan choice that decides whether your backdoor Roth survives
Moonlighting pays twice — if you open the account it comes with
The first time you deposit a check, something changes that your hospital never mentions: in the eyes of the tax code, you are now a business. A business can sponsor its own retirement plan, with its own employer-contribution space, on top of whatever your W-2 job already gives you. Most physicians never open that space. The check gets deposited, taxed at the top , and the second retirement account it could have funded stays closed. The stakes are not small. A physician netting $60,000 from or consulting in 2026 can shelter as much as $36,339 of it — or as little as $11,839 — depending on two choices: which plan you open, and whether your $24,500 employee deferral is already spoken for at your day job. Choose wrong and you do not just shrink the number; one of these two plans can quietly convert every future contribution into a taxable event. This module works the math and names the trap.
Same employer formula, very different everything else
The solo — also called a one-participant 401(k) — and the SEP-IRA share one thing: an identical employer-contribution formula, effectively 20 percent of your net self-employment income after the SE-tax deduction (IRS Publication 560). Everything after that diverges. The rows that decide most physician cases are the employee deferral, which only the solo 401(k) offers, and compatibility, which only the solo 401(k) preserves.
| Feature | Solo 401(k) | SEP-IRA |
|---|---|---|
| Employer contribution formula | 20% of net SE profit after the one-half SE-tax deduction | Identical: 20% of net SE profit after the one-half SE-tax deduction |
| Employee deferral | $24,500 for 2026 (IRS Notice 2025-67) — if not already used at a W-2 plan | None — employer money only |
| Backdoor Roth compatibility | Preserved — 401(k) balances never appear on Form 8606 line 6 | Broken — SEP balances count in the pro-rata base and tax your conversions |
| Roth option | Yes — Roth deferrals are widely offered in plan documents | Permitted since SECURE 2.0 §601, but custodian support has varied — confirm before assuming |
| Loan option | Allowed if the plan document permits: lesser of $50,000 or 50% of vested balance | Never — IRA-based accounts cannot make participant loans |
| Setup and paperwork | Plan adoption document; Form 5500-EZ annually once assets exceed $250,000 | One-page Form 5305-SEP; no annual filing |
The same $60,000 shelters $11,839 — or $36,339
A hospitalist earns $320,000 in W-2 wages — already past the $184,500 Social Security wage base for 2026 — and nets $60,000 on Schedule C from weekend . Because the wage base is used up at work, the side income owes only the 2.9% Medicare portion of SE tax.
Bottom line: On the same $60,000 of side income, a solo 401(k) shelters $36,339 when your deferral is free — $24,500 more than either plan allows once your W-2 plan has already claimed it.
The SEP that taxes every backdoor Roth you ever do
The single most common physician mistake in this decision is opening a SEP-IRA for its famous simplicity, then discovering the cost at conversion time. A SEP-IRA is legally an IRA. When you file for a conversion, line 6 requires the December 31 value of ALL your traditional, SEP, and SIMPLE IRAs, and the of §408(d)(2) taxes your conversion in proportion to that pre-tax balance. A physician with $88,000 in a SEP who converts a $7,500 nondeductible contribution owes tax on roughly $6,911 of it — every single year the SEP balance persists. The solo has no such problem: qualified-plan balances never enter line 6, and a solo 401(k) that accepts roll-ins can even absorb an existing pre-tax IRA to clean up your pro-rata base. Second, quieter trap: the $24,500 elective deferral limit under §402(g) is one limit per person, aggregated across every 401(k) and you participate in. Opening a solo 401(k) does not mint a second deferral.
How to avoid it: Before opening either plan, list every traditional, SEP, and SIMPLE IRA you own and decide whether backdoor Roth contributions are in your future. If they are, choose the solo 401(k), and consider rolling existing pre-tax IRA balances into it before December 31 of the conversion year. Track your combined deferrals across all employers against the single $24,500 limit, and count only the employer contribution as new space when your W-2 plan is already maxed.
Check yourself: which plan protects the conversion?
This step is a quick self-check. Open the full module to try it with your numbers →
Open the right plan before the deadline decides for you
- A solo 401(k) and a SEP-IRA share the same employer formula: 20 percent of net self-employment profit after the one-half SE-tax deduction.
- Only the solo 401(k) adds the $24,500 employee deferral for 2026, and only if no W-2 plan has already used your one-per-person §402(g) limit.
- SEP-IRA balances land on Form 8606 line 6 and tax every backdoor Roth conversion pro-rata; solo 401(k) balances never do.
- SECURE 2.0 §317 allows a first-year sole proprietor to adopt a solo 401(k) after year-end and still make prior-year deferrals by the unextended filing deadline.
- If you own a practice with employees alongside your side entity, §414 controlled-group rules can require the plan to cover those employees — a solo plan may not be legal.
Do this next: This week, compute your 2026 employer-contribution ceiling — net side-income profit, minus one-half of self-employment tax, times 20 percent — and confirm with your W-2 plan how much of your $24,500 deferral remains before choosing which plan to open.
Run this with your own numbers
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