Choosing the Right Retirement Plan: SEP IRA vs. Solo 401(k) vs. Defined Benefit Plan

As a financial advisor who specializes in helping physicians build long-term wealth, one of the questions I get most often from independent contractor physicians is: which retirement plan is right for me?

It’s a great question, and the answer isn’t always straightforward. Below, we’re going to walk through three popular options — SEP-IRAs, Solo 401(k)s, and Defined Benefit plans — using fully updated 2026 contribution limits. Each has its pros and cons, and the right choice depends on your specific situation. Let’s break it down.

SEP-IRA: The Simple Solution

Let’s start with the Simplified Employee Pension IRA, or SEP-IRA. As the name suggests, this is often the go-to choice for its simplicity. It’s easy to set up, inexpensive to maintain, and straightforward to administer. If you’re just starting out as an independent contractor or you’re looking for a no-fuss option, a SEP-IRA might be right for you.

For 2026, you can contribute up to 25% of your net earnings from self-employment, with a maximum limit of $72,000 (up from $69,000 in 2024). That’s a meaningful amount to shelter from taxes each year.

But here’s where it gets important for most 1099 physicians: if you’ve set up an LLC taxed as an S-Corp and pay yourself a W-2 salary, that 25% is calculated on your W-2 income — not your total revenue. So if you’re strategically keeping your W-2 income low to save on payroll taxes (a smart move for many independent contractors), you’re also capping how much you can contribute to the SEP-IRA.

For example: you earn $400,000 a year, but take only $100,000 as W-2 income to minimize Social Security and Medicare taxes. Your maximum SEP-IRA contribution would be $25,000 (25% of $100,000). Not bad — but we can do better.

Solo 401(k): The Flexible Powerhouse

For most independent contractor physicians, the Solo 401(k) is our go-to recommendation at GenFi — and the 2026 numbers make it even more compelling than before.

The Solo 401(k) lets you wear two hats: employee and employer. As the employee, you can defer up to $24,500 in 2026 (up from $23,000 in 2024). As the employer, you can contribute up to 25% of your W-2 compensation on top of that. The combined total can reach $72,000 — with meaningful catch-up options layered on top:

• Ages 50–59 or 64+: Additional $8,000 catch-up → up to $80,000 total
• Ages 60–63: SECURE 2.0 “super catch-up” of $11,250 → up to $83,250 total

Using the same example as before — $400,000 revenue, $100,000 W-2 salary — your Solo 401(k) math looks like this: $24,500 employee deferral + $25,000 employer contribution (25% of $100,000) = $49,500 total. That’s nearly double the SEP-IRA result with the same W-2 income structure.

You might wonder: “Why not just increase my W-2 salary to max out the $72,000?” You could — but it’s worth thinking carefully before doing so. To reach $72,000 in a Solo 401(k), you’d need roughly $190,000 in W-2 wages ($24,500 employee + 25% × $190,000 ≈ $72,000). Increasing your salary from $100,000 to $190,000 would add roughly $10,000–$13,000 in payroll taxes. That’s real money you’d be spending permanently, just to defer a bit more into retirement.

Remember: retirement contributions defer taxes — they don’t eliminate them. Payroll tax savings, on the other hand, are permanent. In most cases, keeping the W-2 salary reasonable and contributing what you can at that level produces better overall results than maximizing retirement contributions through a higher salary.

One important 2026 rule for high earners: If your wages exceed $150,000, your catch-up contributions (the amount above the base $24,500 limit) must be made as Roth (after-tax). Your base deferral can still be pre-tax or Roth — it’s only the catch-up portion that’s mandated as Roth for high earners. This is a SECURE 2.0 change worth flagging with your CPA.

One administrative note: once your Solo 401(k) balance exceeds $250,000, you’ll need to file a Form 5500-EZ with the IRS annually. It’s not overly burdensome, but it’s worth knowing upfront.

Defined Benefit Plan: The Heavy Hitter

Now for the big gun. A Defined Benefit plan — essentially a self-funded pension — isn’t for everyone, but it can be a game-changer for high-earning physicians who are older and want to accelerate their tax-deferred savings significantly.

Here’s how it works: you specify the annual retirement benefit you want to receive, and an actuary calculates the annual contributions needed to fund it. The contribution amounts are determined by your age, income, and desired benefit — and they can be massive. For the right physician in their late 40s or 50s, contributions of $150,000 to $290,000 per year are possible. The IRS Section 415(b) annual benefit limit for 2026 is $290,000, which sets the ceiling on what the plan can promise — and thus how much you can contribute.

The primary advantage is the ability to shelter an enormous amount of income from taxes in a single year. For a physician who started saving late or has had several high-income years and wants to catch up, no other plan type comes close.

But the trade-offs are real:

1. Complexity: You must work with an actuary every year to determine your required contribution. This isn’t something you can administer yourself.
2. Mandatory funding: Once established, you’re expected to contribute the actuarially required amount each year. Unlike a 401(k) or SEP-IRA, you can’t easily skip a year in a lean one.
3. Setup time and cost: Setting up a Defined Benefit plan can take up to three months and involves ongoing administration fees — typically $1,500–$3,500 per year for a solo plan.
4. Employee coverage: If you have employees beyond yourself, the plan may need to cover them as well, which changes the math considerably.

That said, there are two scenarios where a Defined Benefit plan becomes particularly powerful for physicians:

First, you can combine a Defined Benefit plan with a Solo 401(k), stacking both to maximize annual deferrals without increasing your W-2 salary or payroll taxes. The total can easily exceed $150,000 per year in combined pre-tax contributions for the right physician.

Second, a Defined Benefit plan can help you qualify for the Qualified Business Income (QBI) deduction. In 2026, the QBI phase-in range for married couples filing jointly runs from $403,500 to approximately $553,500 — a notably wider range than prior years, thanks to changes in the One Big Beautiful Bill Act. If your taxable income sits above $403,500, Defined Benefit contributions can bring it below the threshold and unlock a deduction worth up to 20% of qualified business income. For a physician earning $400,000–$600,000, this can be worth tens of thousands of dollars annually.

2026 At-a-Glance Comparison

Real-World Example: A Case Study

Let’s bring this to life. Meet Dr. Smith — a 48-year-old independent contractor physician in Georgia. She’s married, filing jointly, and her spouse earns $100,000 through W-2 employment. Dr. Smith earns $400,000 annually through 1099 income and has about $10,000 in deductible business expenses. Here’s how three different approaches play out.

Note: The tax breakdowns below are directionally illustrative for 2026 and updated to reflect 2026 contribution limits. Exact figures will vary based on individual circumstances, deductions, and state tax rules — work with an advisor to model your specific situation.

Scenario 1: The Simple Approach (SEP-IRA, Sole Proprietor)

Dr. Smith operates as a sole proprietor, receives 1099 income directly via Schedule C, and maxes out a SEP-IRA. With $400,000 in income and $10,000 in expenses, her net self-employment income is $390,000. After the self-employment tax deduction, her SEP-IRA contribution (20% of net SE income for self-employed filers) is approximately $72,000 at the 2026 cap.

The catch: she’s paying self-employment tax on the full $390,000 — roughly $31,000–$33,000 in SE taxes. That’s a significant number, and it’s the main driver of the difference in the scenarios below.

Estimated total tax burden: ~$115,000–$120,000

Scenario 2: The Strategic Approach (LLC + S-Corp + Defined Benefit Plan)

Dr. Smith forms an LLC elected to be taxed as an S-Corp, pays herself a $100,000 W-2 salary, and contributes $72,000 to a Defined Benefit plan (a meaningful but not maximum contribution for her age and income).

By routing income through the S-Corp and taking a reasonable salary, she pays payroll taxes only on the $100,000 W-2 — not the full $400,000. That reduces payroll taxes to roughly $15,000, compared to $31,000+ in Scenario 1. Add in the Defined Benefit contribution bringing down taxable income, and the combined savings are substantial.

Estimated total tax burden (including admin costs): ~$105,000–$110,000 — roughly $10,000–$15,000 less per year than Scenario 1.

Scenario 3: The Overzealous Approach (LLC + S-Corp + Maxed Solo 401k at High Salary)

Dr. Smith forms the same LLC taxed as an S-Corp, but increases her salary to $190,000 specifically to max out a Solo 401(k) at the full $72,000 ($24,500 employee + $47,500 employer at 25% of $190,000).

Here’s the problem: that higher salary also triggers roughly $10,000–$12,000 in additional payroll taxes compared to Scenario 2. She’s spending real, permanent money now to defer taxes on retirement savings she’ll pay taxes on later anyway.

Estimated total tax burden: ~$118,000–$122,000 — more expensive than both the simple SEP approach and the strategic Defined Benefit approach.

What We Can Learn From This

1. Structure matters enormously. The LLC / S-Corp structure paired with a reasonable W-2 salary is one of the highest-leverage moves an independent contractor physician can make.
2. Salary strategy is everything. A lower, reasonable W-2 salary reduces payroll taxes permanently. That’s money you never give back.
3. More isn’t always better. Maxing out retirement contributions by inflating your salary can cost more than it saves, especially when the additional deferrals simply shift taxes to retirement rather than eliminate them.
4. The gap is large. The difference between the best and worst scenario here is $13,000–$17,000 per year. Over a decade, that’s $130,000–$170,000 — before investment returns on those savings.

Choosing Your Path

So which plan is right for you? Here’s our general framework:

If you value simplicity above all else — or you’re in late April and need to open a plan retroactively for last year’s 1099 income — a SEP-IRA is your best bet. It’s easy, fast to open, and still allows for meaningful contributions up to $72,000.

For most independent contractor physicians, we lean toward recommending a Solo 401(k). It offers higher contributions at lower salary levels than a SEP-IRA, preserves your ability to do backdoor Roth contributions without triggering the pro-rata rule, and gives you a Roth option that’s actually available at most major custodians today.

If you’re in your late 40s or 50s, earning $400,000 or more, and want to significantly accelerate tax-deferred savings — or if a Defined Benefit plan could bring your income below the QBI phase-in threshold — that’s when we’d seriously consider a Defined Benefit plan, potentially in combination with a Solo 401(k).

The right answer depends on your income level, age, business structure, state of residence, and long-term financial goals. These plans are powerful tools, but they’re just one part of your overall financial picture.

Building long-term wealth as a physician is a marathon, not a sprint. The right retirement plan can give you a meaningful head start — but it’s your consistent effort and smart planning that carry you across the finish line.