By Michael Kamali, CEO of California Financial Consulting, is in MicroMasters program at MIT and the Doctor of Business program at the University of Maryland GC, MBA, ChE, ChFC
This is part 1 of a series of retirement and wealth-building options for California Doctors and Dentists.
As a high-income medical or dental professional in California, your financial reality is complex: you’re balancing a rewarding career with high taxes, a demanding schedule, and the constant pressure to make wise financial decisions for your future, and potentially your staff.
One retirement tool that often enters the conversation for self-employed professionals and small business owners is the SEP IRA (Simplified Employee Pension Individual Retirement Account). But is it truly a good fit for California doctors and dentists earning over $200,000 a year?
Let’s break down what a SEP IRA is, how it works, and most importantly, its real-world pros and cons for high earners in California’s high-tax environment.
What is a SEP IRA?
A SEP IRA (Simplified Employee Pension) is a retirement account primarily designed for self-employed individuals or small business owners (including S corporations, partnerships, and sole proprietors). It allows for tax-deductible employer contributions to retirement accounts for both the employer and their eligible employees.
Unlike a Traditional or Roth IRA, contributions to a SEP IRA come solely from the employer, not the employee. This means if you’re self-employed or a practice owner, you’re contributing on your behalf, as well as potentially for your team.
Key SEP IRA Features:
· Only employer contributions (no employee deferrals)
· Contributions are tax-deductible
· High contribution limits (up to $70,000 in 2025 or 25% of compensation, whichever is less)
· Funds grow tax-deferred
· Must contribute equally (percentage-wise) for all eligible employees
· No Roth option—SEP IRA is pre-tax only
Pros of SEP IRA for High-Earning Doctors and Dentists in California
1. Significantly Higher Contribution Limits
Compared to Traditional or Roth IRAs, which limit contributions to $7,000 annually (or $8,000 if over 50), a SEP IRA allows contributions of up to $70,000 in 2025 or 25% of net income—whichever is less.
🔍 Example: If you earn $280,000 from your practice, you can contribute up to $70,000—this dwarfs the IRA limits and even outpaces 401(k)s for many.
This high contribution limit can dramatically reduce your taxable income and supercharge retirement savings.
2. Immediate and Substantial Tax Deduction
For high earners in California, where combined federal and state tax rates can exceed 45%, the ability to deduct up to $70,000 reduces your immediate tax burden significantly.
🔹 Let’s say you’re taxed at 45%: A $70,000 contribution could save you over $31,000 in taxes for that year.
This is one of the most compelling advantages of a SEP IRA in a high-tax state like California.
3. Easy to Set Up and Administer
Unlike a 401(k) plan, which requires IRS reporting, nondiscrimination testing, and third-party administration, SEP IRAs are very straightforward.
· No annual IRS filing (like Form 5500)
· Minimal paperwork
· No need for complex compliance testing
· Most major brokerages offer free or low-cost SEP accounts
This makes it appealing for time-pressed professionals running a private practice.
4. Tax-Deferred Growth
Investments in a SEP IRA grow tax-deferred, which means you won’t pay capital gains or income tax on dividends or earnings while funds remain in the account.
Over time, this leads to a snowball effect of compounding growth, which is especially valuable if you start making contributions early in your career.
5. Flexibility in Contributions
You’re not required to contribute every year. Contributions are discretionary, meaning you can skip a year if your practice revenue dips or you need to prioritize other expenses.
This is ideal for doctors and dentists who experience income variability (e.g., due to patient flow, expansion costs, or insurance reimbursement delays).
6. Great for Solo Practitioners or Spouse-Owned Practices
If you have no employees (or only employ your spouse), a SEP IRA becomes even more attractive. You can contribute the maximum for yourself and your spouse without having to match contributions for other employees.
7. Eligibility Window for Contributions
You have until your tax filing deadline—including extensions—to make SEP IRA contributions. For example, you can make 2025 contributions as late as October 15, 2026, if you file for an extension.
This gives flexibility in tax planning based on final revenue numbers.
Cons of SEP IRA for High-Income California Doctors and Dentists
1. Mandatory Equal Contributions for Employees
This is the biggest drawback if you have staff. If you contribute 25% of your salary to your own SEP IRA, you must contribute 25% of wages for every eligible employee.
That generosity can become expensive quickly.
🔍 Example: If you have two assistants each earning $60,000, and you contribute 25% to your plan, you must also contribute $15,000 each for them, totaling $30,000.
This can turn your $70,000 tax benefit into a $100,000 outlay.
2. No Roth Option
Unlike a 401(k), a SEP IRA does not offer Roth (after-tax) contributions. High earners often value Roth vehicles for long-term tax-free withdrawals, especially when anticipating higher tax rates in retirement.
SEP IRAs lack this flexibility.
If you want Roth benefits, you may need to pursue a Backdoor Roth IRA strategy alongside your SEP.
3. Required Minimum Distributions (RMDs)
Starting at age 73 (or 75, depending on birth year), you’ll be required to take minimum distributions from your SEP IRA, whether you need the funds or not.
This can result in significant taxable income during retirement, especially if your account has grown substantially.
4. Contribution Limit Based on Net Income
If you’re self-employed (not operating as an S-Corp or C-Corp), the 25% contribution is based on net earnings after deducting half of self-employment taxes.
Your contribution may be slightly lower than 25% of your gross income.
5. No Catch-Up Contributions
Unlike Traditional or Roth IRAs and 401(k)s, SEP IRAs don’t allow for age 50+ “catch-up” contributions. If you’re nearing retirement and want to accelerate your savings, this is a limitation.
6. Limited Control Over Plan Design
You can’t set eligibility restrictions as narrowly as with a 401(k) plan. Generally, if an employee:
· Is at least 21 years old
· Has worked for you in three of the past five years
· Earned at least $750 in compensation
…they’re eligible for SEP contributions.
This restricts flexibility in how you reward employees versus owners.
When a SEP IRA Works Best for High-Income Doctors and Dentists
A SEP IRA is an excellent choice if:
· You’re a solo practitioner or only employ your spouse
· You want high contributions without the complexity of a 401(k)
· You value simplicity and flexibility over customization
· You want a significant upfront tax deduction to offset your high California tax bill
· You want to delay contributions until after year-end for better tax planning
When a SEP IRA May Not Be Ideal
It may not be the best choice if:
· You have multiple staff and want to limit employer costs
· You need Roth (tax-free) growth options
· You’re looking to add catch-up contributions after age 50
· You want more control over employee vesting and eligibility
· You’re planning a defined benefit or cash balance plan for even higher savings
Tax Planning Tip for California Doctors and Dentists
Consider combining a SEP IRA with a Backdoor Roth IRA or Cash Balance Plan if:
· You’re hitting the SEP max and want more savings
· You want Roth exposure alongside pre-tax
· You’re focused on retirement tax diversification
Also, coordinate your SEP contributions with your business structure. S-Corp owners must take W-2 wages, and SEP contributions are based on W-2 comp, not distributions.
Final Thoughts
For California doctors and dentists earning over $200,000 annually, a SEP IRA can be a powerful and tax-efficient retirement tool, especially if you’re self-employed or have a lean team. Its high contribution limits, simplicity, and flexibility make it a go-to for many high-income professionals.
However, the mandatory employee contributions and lack of Roth flexibility can create challenges as your practice scales. Please be sure to compare SEP IRAs with other advanced retirement strategies, such as Solo 401(k)s or defined benefit plans, to find the best long-term fit for you.
If you’re unsure which plan best fits your situation, consider consulting with a fiduciary investment advisor who is familiar with California’s high-income tax environment and the specific financial needs of medical professionals.
Next Article: What is a Backdoor Roth IRA and how to take advantage of it?
California Financial Consulting: https://www.CaFin.ai or Tel: (310) 541-1000
Advisor LinkedIn profile: https://www.linkedin.com/in/michaelkamali/
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The information provided in these materials is intended solely for educational and informational purposes and does not constitute financial, investment, tax, legal, or accounting advice. Nothing contained herein should be construed as a recommendation to buy, sell, or hold any security or investment product, nor as a guarantee of any financial outcome.
Readers are strongly advised to consult with their own qualified financial advisors, tax professionals, and legal counsel before making any investment or financial decisions. Every individual’s financial situation is unique, and professional guidance is essential to ensure that decisions are made based on personal circumstances and regulatory considerations.
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