Setting up a Solo 401(k): The Basics

I find this to be a really complicated topic. I’m going to cover the basics and try to give you a high-level overview of the Solo 401(k): what it is, why it’s useful for locums physicians, and the three ways to set one up.

What is the advantage? The Solo 401(k) is essentially a "super-powered" retirement account. Unlike the 401(k) you had at your W2 job, you’re both the boss and the worker. This allows you to contribute twice. You contribute once as the employee and once as the employer. This structure effectively turbocharges your tax savings.

Before diving into the "how," you should understand some rules.

First, you can only contribute using money earned from self-employment (1099 income). You cannot defer W2 income into this plan.

Second, as the name implies, this is for solo practitioners. 

The Solo 401(k): How Contributions Work

1. As the EmployEE (The Deferral) You can defer up to $24,500 (for 2026) of your net earnings. 

This $24,500 limit is shared across all 401(k) plans. If you already maxed out your employee deferral at a W2 job, you can’t put another $24,500 into your Solo 401(k). You’re limited to the "Employer" contribution below.

2. As the EmployER (The Profit Share) Your business can contribute up to 20% of your net adjusted self-employment income. (Technically it is 25% of compensation, but the math works out to roughly 20% of your net business profit after deducting half of your self-employment tax).

This contribution calculation can be complicated if you also have W2 income. The Finance Buff has an excellent post on this and links to a spreadsheet that provides guidance on making this calculation. As always, you should discuss your particular situation with a tax professional.

The Total Cap: For 2026, the combined total (Employee + Employer) cannot exceed $72,000 (plus the $8,000 catch-up if eligible).

Choosing Your Path: Three Options

There’s no "one-size-fits-all" approach. 

Option 1: The "Prototype Plan" (e.g., Fidelity, Schwab). This is the lowest effort option. You adopt a pre-approved plan document from a major brokerage.

• Pros: Free (usually $0 fees), simple interface, and easy setup.

• Cons: Very rigid. These plans typically don’t allow for a Mega Backdoor Roth (MBDR) or participant loans. You are the Plan Administrator. If you trigger an audit or forget to file Form 5500-EZ (once your plan hits $250,000 in assets), there’s no professional support to help you. It’s entirely DIY compliance.

Option 2: Custom solo 401(k) with The "Document Reseller" (e.g., MySolo401k.net, Discountsolo401k.com) These companies sell you a premium, IRS-approved plan document that gives you flexibility and control.

• Pros: Highly flexible. Supports the Mega Backdoor Roth and alternative assets (like crypto or real estate). You can open the bank accounts at any local bank.

• Cons: You are still the Trustee and Administrator. You must track your own "buckets" (Pre-tax vs. Roth vs. After-tax). If you mess up the accounting, you are liable. Fees are typically ~$500 setup plus ~$125/year but vary from one service to the next.

Option 3: Custom solo 401(k) + Third-Party Administrator (e.g., Employee Fiduciary). 

• Pros: You can also set up a MBDR-compatible plan this way. The benefit of having a third party administrator is that they do the heavy lifting on compliance, audit support and correction, proactive law monitoring, and meticulous “bucket” tracking for your contributions.

• Cons: Cost. Employee Fiduciary charges $250 to set up and then a $500 annual base fee plus 0.08% of assets under management.

I picked Option 3 for two reasons. First, I wanted the ability to make a MBDR contribution. Second, as a new 1099 earner, I wanted the safety net provided by having a TPA. 

There’s a lot more to all this, but hopefully this gives you a basic understanding. If you want to read more on this topic, I highly recommend checking out the White Coat Investor’s Solo 401(k) Deep Dive.

Disclaimer: I am a dermatologist, not a CPA or tax attorney. The tax code changes frequently. Please consult a qualified tax professional before establishing your plan.