If you earn — shifts, locum work, medical directorships, expert witness fees — you can open a retirement account that shelters a large share of it from tax this year. The two candidates are the SEP IRA and the solo , and at typical moonlighting income the difference is not subtle: on $40,000 of 1099 income, a physician who has not used their employee deferral elsewhere can put away $32,393 in a solo 401k versus $7,893 in a SEP IRA. Even when the dollar amounts tie, the SEP IRA carries a hidden cost that the solo 401k does not: it breaks the .
Brokerages historically pushed the SEP IRA because it takes five minutes to open. That convenience argument made sense in 2010. Today every major low-cost brokerage offers a free solo 401k, and the SEP's remaining advantages have mostly evaporated. This article works through the decision properly — contribution mechanics, the deferral coordination rules across your W-2 job and your side income, the problem, and the narrow cases where a SEP still earns its place.
One definitional note before the math: "solo 401k" (also sold as an individual 401k or i401k) requires that your 1099 business has no employees other than you and, optionally, your spouse. Moonlighting and locum physicians virtually always qualify.
The short answer
Open the solo 401k. At moonlighting-level 1099 income, it wins on three independent grounds:
- Larger contributions whenever your $24,500 employee deferral is not fully consumed at a W-2 job — and even partially unused deferral capacity tips the math.
- A Roth option. Solo 401ks accept Roth employee deferrals; whether you want Roth or pre-tax dollars, the solo 401k gives you the choice.
- No pro-rata pollution. A SEP IRA balance counts against you on and makes every future backdoor Roth conversion partly taxable. A solo 401k balance is invisible to that calculation.
The SEP IRA wins on exactly one dimension — setup speed near a filing deadline — and recent law changes have narrowed even that. The rest of this article is the supporting math, because "trust me" is not how physicians make decisions.
How the contribution math works
Both accounts let your 1099 business make an employer contribution of up to 20% of your net self-employment earnings. ("Net self-employment earnings" means your Schedule C profit minus the deduction for half of your self-employment tax. The commonly quoted "25% of compensation" figure is the same limit expressed against a different base; for the self-employed it works out to 20% of net earnings.)
The solo 401k adds a second layer the SEP completely lacks: the employee deferral, up to $24,500 in 2026 ($32,500 if you are 50 or older, and $35,750 at ages 60–63 under the SECURE 2.0 super catch-up). You can defer up to 100% of your net self-employment earnings up to that cap, on top of the 20% employer piece.
Two coordination rules govern how this interacts with your hospital job:
- The employee deferral limit is per person, across all plans. If you put $24,500 into your hospital , you have $0 of deferral left for the solo 401k. If you deferred $15,000 at work, you have $9,500 left for the solo plan.
- The overall §415(c) limit — $72,000 in 2026 for combined employee plus employer contributions — is per unrelated employer. Your hospital's plan and your solo 401k each get their own $72,000 ceiling. Your side business does not compete with your hospital's for that space.
One more nuance worth real money: a governmental or hospital 457(b) does not count against the $24,500 deferral limit — it has its own separate $24,500. A physician with a 403(b), a 457(b), and a solo 401k is playing with two deferral buckets plus an employer contribution layer.
Key insight
The deferral limit follows you; the $72,000 limit follows the employer. Max your 403(b) at the hospital and your solo 401k still has its own $72,000 of headroom — fillable by employer contributions and, in some plan documents, after-tax contributions.
Worked example: $40,000 of moonlighting income
Assumptions, stated explicitly: an attending earns $310,000 W-2 from the hospital — above the 2026 Social Security wage base of $184,500, so the Social Security portion of self-employment tax is already satisfied — plus $40,000 on a 1099 for moonlighting shifts, with no other business expenses.
Example calculation
Step 1 — self-employment tax. Net earnings subject to SE tax: $40,000 × 92.35% = $36,940. Social Security portion: $0 (wage base already met through W-2 wages). Medicare portion: $36,940 × 2.9% = $1,071.
Step 2 — the deduction for half of SE tax. $1,071 ÷ 2 = $536.
Step 3 — net self-employment earnings. $40,000 − $536 = $39,464.
Step 4 — maximum employer contribution (identical for both accounts). $39,464 × 20% = $7,893.
SEP IRA maximum: $7,893.
Solo 401k maximum: $7,893 employer + up to $24,500 employee deferral = $32,393 — if no deferral was used at the W-2 job.
Now the realistic scenarios:
| Hospital 403(b) deferral used | SEP IRA max | Solo 401k max | Solo 401k advantage |
|---|---|---|---|
| $0 (no plan, or not contributing) | $7,893 | $32,393 | $24,500 |
| $12,000 | $7,893 | $20,393 | $12,500 |
| $24,500 (maxed) | $7,893 | $7,893 | $0 in dollars — but see below |
At a 35% , the first row is $8,575 of additional federal tax deferred this year. Even in the bottom row — deferral fully consumed at the hospital — the solo 401k still ties on dollars while preserving your backdoor Roth and your Roth deferral option. There is no income level in this table where the SEP wins.
The pro-rata problem: how a SEP breaks your backdoor Roth
This is the dealbreaker that matters even when the contribution amounts tie. Most attendings are over the 2026 phase-out ( of $153,000–$168,000 single, $242,000–$252,000 married filing jointly), so the backdoor Roth — a nondeductible contribution followed by a Roth conversion, reported on Form 8606 — is the standard way physicians fund a Roth IRA.
Form 8606's pro-rata rule looks at the combined December 31 balance of all your traditional, SEP, and SIMPLE IRAs. If that combined balance is anything other than zero, every conversion is proportionally taxable.
Concretely: you have $42,500 sitting in a SEP IRA from a few years of moonlighting, and you convert a fresh $7,500 nondeductible contribution. Your total IRA money is $50,000, of which $7,500 (15%) is after-tax basis. Your $7,500 conversion is therefore 85% taxable — $6,375 of unexpected ordinary income at your marginal rate, while the basis stays smeared across the SEP. Every year you repeat the backdoor, the same arithmetic repeats.
A solo 401k is not an IRA, so it never enters this calculation. Better: most solo 401k plan documents accept incoming rollovers from IRAs, which makes the solo 401k the standard cleanup vehicle — roll your existing SEP or pre-tax IRA balance into the solo 401k, get your IRA line to zero by December 31, and the backdoor Roth runs clean from then on.
Important
If you already use the backdoor Roth, opening a SEP IRA actively damages your tax situation even if you contribute the identical dollar amount you would have put in a solo 401k. The accounts are not interchangeable for a high-income physician.
Roth options and the SECURE 2.0 fine print
The solo 401k's Roth side is straightforward: your $24,500 employee deferral can be designated Roth at any income level — no phase-out, since the Roth IRA MAGI limits do not apply to employer plans. For a moonlighting attending who expects high lifetime tax rates, splitting deferrals between pre-tax and Roth is a legitimate strategy conversation; the point is the solo 401k lets you have it.
SECURE 2.0 did authorize Roth SEP IRA contributions beginning in 2023, which on paper narrows the gap. In practice, custodian support arrived slowly and unevenly, and the mechanics — contributions are includible in income in the year made, with reporting that differs from a Roth 401k deferral — are still settling. Custodian support remains limited even now — if the Roth option is what draws you toward a SEP, confirm your brokerage actually offers Roth SEP contributions before opening the account.
A related SECURE 2.0 note: employer contributions to a solo 401k may also be designated Roth where the plan document and provider support it, again with the contribution taxed in the year made. Provider support for Roth employer contributions is similarly uneven — read the plan document and confirm the feature exists before building a strategy on it.
Note that a Roth SEP balance is Roth money and should not create pro-rata pollution — but any pre-tax SEP dollars you accumulate still do, and the pro-rata exposure is the structural reason the SEP loses this matchup regardless of how the Roth fine print evolves.
When a SEP IRA actually makes sense
Honest accounting — the SEP has three remaining use cases:
- The deadline save. A SEP can be opened and funded up to your tax filing deadline, including extensions, for the prior year. If it is September and you just realized you forgot to shelter last year's locum income, the SEP may be the only door still open. SECURE 2.0 also softened this advantage: a sole proprietor can now establish a solo 401k after year-end and, for the plan's first year, make employee deferrals up to the unextended filing deadline — April 15 for a calendar-year sole proprietor, even if the return itself goes on extension. This applies to the plan's first year only.
- You will never do a backdoor Roth. If your household income sits under the Roth IRA phase-out and you expect it to stay there, the pro-rata issue is moot and a SEP's simplicity is genuinely fine.
- You have non-spouse employees. Then a solo 401k is off the table entirely and you are choosing between a SEP (which requires contributing the same percentage for eligible employees), a SIMPLE IRA, or a full 401k — a different article's decision.
For a typical moonlighting attending, none of the three applies.
Setup and administration
What the solo 401k costs you in exchange for its advantages:
- An EIN. Free from the IRS website in minutes; do not use your SSN on plan paperwork.
- A plan document. The major brokerages provide a free prototype. Read what it supports: incoming IRA rollovers, Roth deferrals, and loan provisions vary. If you eventually want after-tax contributions for a mega backdoor Roth, most free prototypes do not support them and you would need a paid custom document — relevant later, not at $40,000 of side income.
- Establishment timing. Set the plan up in the tax year — and make any deferral election by December 31 — rather than relying on the retroactive first-year rules.
- Form 5500-EZ, a short informational filing, once plan assets exceed $250,000. The penalty for forgetting it is severe, so calendar it now; until then, annual administration is effectively zero.
The SEP requires none of this — Form 5305-SEP at a brokerage and you are done — which is exactly why it gets recommended by default. Five minutes of saved paperwork is a bad trade for a broken backdoor Roth.
Common questions
My hospital 403(b) is already maxed. Is the solo 401k still worth opening?
Yes. You still get the 20% employer contribution ($7,893 in the example above — identical dollars to a SEP), plus a rollover destination that keeps your IRA line at zero for the backdoor Roth. The deferral limit being consumed does not touch the employer layer.
Do I need an LLC to open a solo 401k?
No. A sole proprietorship — which is what you are by default when you receive a 1099 — qualifies. Get an EIN; skip the LLC unless you want it for other reasons.
I already have a SEP IRA with a balance. What now?
Stop contributing to it, open a solo 401k whose plan document accepts incoming rollovers, and roll the SEP balance in. Once your traditional/SEP/SIMPLE IRA balances are zero on December 31, your backdoor Roth conversions are clean going forward.
Can my spouse contribute too?
If your spouse legitimately works in the business and is compensated, a solo 401k can cover both of you — each with their own deferral limit and employer contribution. The work and compensation must be real and documented, not decorative.
Does the solo 401k reduce my QBI deduction?
Pre-tax contributions reduce qualified business income, which can shave the 20% QBI deduction where you are eligible for it — many physicians are phased out of QBI as a specified service business anyway. If you are in QBI range, this is a genuine point in favor of Roth deferrals inside the solo 401k; run it with your CPA.
What to do next
- Total your expected 2026 1099 income and your year-to-date employee deferrals at your W-2 job.
- Run the math above with your numbers: 92.35%, SE tax, half-SE-tax deduction, 20% employer piece, remaining deferral capacity.
- Open a solo 401k at a major brokerage before December 31 — confirm the plan document accepts IRA rollovers and Roth deferrals.
- If you hold a pre-tax SEP or traditional IRA balance, roll it into the solo 401k before year-end to clear the pro-rata calculation.
- Set a recurring transfer from your 1099 deposits so contributions happen during the year, not in a panic in April.
- Calendar Form 5500-EZ for whenever plan assets cross $250,000.
The moonlighting calculator in Attending Financial will show what each marginal shift earns after taxes and how much of it a solo 401k can shelter at your actual deferral capacity — useful before you commit to extra call.