Retirement Planning for Therapists in Private Practice

Choosing the right retirement plan is a decision that confuses and intimidates many therapists in private practice. With complex tax implications and varying contribution limits, it’s a major financial choice that impacts both your current tax bill and long-term wealth building.

Whether you’re a solo practitioner considering a SEP IRA, a growing practice evaluating 401k options, or a high-earning therapist looking to shelter significant income through advanced structures like Cash Balance Plans, your retirement strategy should evolve with your practice’s growth and income levels.

This 2025 guide compares contribution limits, tax advantages, and administrative requirements for each retirement plan available to therapists in private practice. Discover which plan offers the perfect balance of tax benefits, flexibility, and simplicity for your unique practice situation.

Key Takeaways:

• SEP IRAs offer high contribution limits ($70,000 in 2025) with no administrative costs, ideal for solo practitioners without employees.
• Solo 401(k)s allow owner-only practices to contribute as both employer and employee, with maximum contributions matching SEP IRAs at $70,000.
• Traditional 401(k)s become necessary when hiring employees, offering attractive benefits but requiring more administration. Maximum contributions to a 401k could be up to $70,000.
• Cash Balance Plans paired with 401(k)s can allow tax deductions exceeding $200,000-400,000 annually, best for high-earning established practices.
• The right retirement plan can simultaneously reduce current taxes and build long-term wealth. The wrong retirement plan could leave you with tons of paperwork, expenses, and oppressive regulations.

For more detailed information about various plan types, you can check out the IRS’s info page for Retirement Accounts

 

Why Retirement Plans Matter

As a private practice therapist, you excel at helping others plan for their future. But what about your own financial future? Whether you’re just starting your practice or considering the transition from solo to group therapy practice, choosing the right retirement plan is crucial for your long-term financial security.

The earlier you begin thinking about retirement—whether you’re solo or have employees—the more you can take advantage of tax benefits, compounding growth, and peace of mind.

In this article, we’ll demystify the major retirement plan options available to private practice owners. You’ll discover how each plan works, who it benefits the most, and when a particular structure might no longer fit your needs.

 

Tax Savings & Long-Term Wealth Building

Beyond just having “a place to put money,” retirement plans provide major tax advantages. With the exception of Roth IRAs (which offer tax-free withdrawals later), most contributions to qualified retirement accounts work like any other tax deduction: they lower your taxable income right now.

Example:

Imagine your practice pays $1,000 in rent each month. That $1,000 is a straightforward tax deduction—but that money goes straight to your landlord. Now suppose you put $1,000 into a qualified retirement plan. You get the same $1,000 deduction, which lowers your tax bill, and you keep that money in your own account, helping you build long-term wealth. Instead of the money being in your checking account, it’s in your retirement account. You’ve essentially created a tax write-off out of thin air.

This dual benefit of lowering your taxes in the current year and increasing your retirement nest egg is the central reason why setting up a proper retirement plan early can dramatically impact your future financial security.

Here is a breakdown of the most common retirement plans available to therapists:

SEP IRAs

Overview

A SEP IRA (Simplified Employee Pension) is a popular choice for solo practitioners, thanks to its simplicity and tax advantages. A SEP IRA lets you make tax-deductible contributions on behalf of yourself (and possibly employees).

Key Benefits

• No Administrative Costs: Unlike many 401k options, a SEP has no annual maintenance fees.
• High Contribution Limits: For tax year 2025, you can contribute the lesser of:
  • $70,000 or
  • 25% of your self-employed income (or W-2 if you’re an S-Corp)
• Adjustable Contributions: You can change your contribution amount or percentage annually based on practice performance, giving you much desired flexibility.

When It’s Time to Move On

• Hiring Employees: If you bring on full-time W-2 employees (non-owner, non-spouse), you must contribute the same percentage for them as you do for yourself. This can become prohibitively expensive if you’re contributing a high percentage.
• Next Steps: If you need to switch to a plan that supports employees differently, you’ll often roll your existing SEP IRA money into another plan–like a 401k–and close out the SEP plan.

401(k) Plans (Solo and Traditional)

Overview

When people think “retirement plan,” they usually think of a 401k. With good reason: 401k plans are versatile, widely recognized by employees, and can significantly reduce tax liabilities through deductible contributions.

Solo 401k

• For Owner-Only Practices: Ideal if you’re the only full-time person in the business, or you employ only your spouse.
• High Contribution Potential: Because you’re technically both “employer” and “employee,” you can contribute more (via elective deferrals plus employer profit-sharing) than SIMPLE IRAs and Traditional IRAs. The contribution limit for tax year 2025 is $23,500 on the employee side and up to $43,500 on the employer side. Combined, you’ll be at $70k which is the same as SEP IRAs. (you can do slightly more if you’re over 50 years old.)
• Flexibility: You can change your contribution amount each pay period if the need arises.

Traditional 401k

• For Growing Practices and Larger Practices: Once you hire employees, you’ll need a group 401k structure if you want to continue with a 401k-type plan.
• Employee Appeal: Offering a standard 401k with employer matching is often seen as an attractive benefit, especially when competing for top talent in mental health care.
• Customization: Work with a Third-Party Administrator (TPA) to design employer matching formulas, vesting schedules, and more.
• Admin Costs: Expect to pay some administrative fees for annual filings (e.g., IRS Form 5500) and compliance testing, especially once you have non-owner employees.

SIMPLE IRA

Overview

A SIMPLE IRA is often described as a “lighter” version of a 401k for small businesses. Just like a 401k employees can make salary-deferral contributions, and employers provide either a matching contribution or a mandatory nonelective contribution. However, even though these plans are “simple,” in my opinion, they put too much administrative burden on the practice owner.

Key Benefits of SIMPLE IRAs

• Lower Costs: It’s generally cheaper to set up and maintain than a full-fledged 401k.
• Straightforward Employer Match: You can choose between matching a percentage of your employees’ contributions (commonly up to 3%) or contributing a flat 2% of salary for each eligible employee.

Disadvantages of SIMPLE IRAs

• Heavier Admin for Owners: You (as the business owner) often handle the administrative burden—coordinating payroll deductions, ensuring compliance, etc.
• Lower allowed contributions than 401k: Contribution limits for SIMPLE IRAs are set at $16,500 for tax year 2025 compared to $23,500 for 401k’s. In both cases, employees over the age of 50 can contribute slightly more.

Editorial Note – Why I don’t recommend SIMPLE IRAs: While materially similar to 401k’s, the administrative burden falls on the practice owner instead of a third-party administrator (TPA). My personal philosophy is to take as much of the financial side of running a practice off of the owner’s hands…managing a SIMPLE IRA is in direct opposition to that goal. They are less expensive though, so you’ll have to see if you’re willing and able to tackle this task.

Cash Balance Plans

Overview

A Cash Balance Plan is a type of defined benefit plan, functioning more like a traditional pension. They are usually implemented alongside a 401k plan. This setup is extremely complex and expensive to administer so they’re only suited for extremely high-earning practice owners who want to accelerate retirement contributions to the highest possible degree. If you’re in that boat, read on.

Key Benefits of Cash Balance Plans

Substantial Contributions: Depending on your age and income, you could potentially contribute over $400,000! This is more than 5x the amount you can contribute in any other plan.

Disadvantages of Cash Balance Plans

• High Cost & Complexity: Cash balance plans are the most expensive to administer. You’ll need an actuary—usually supplied by a Third Party Administrator (TPA)—to calculate minimum funding requirements.
• Long-Term Commitment: Ideally, you should maintain a cash balance plan for at least 3-5 years. Shutting one down prematurely can lead to extra fees or IRS scrutiny.

Cash balance plans are best for established practices with very high incomes and owners looking for bigger tax deductions than possible with any other type of retirement plan.

 

Traditional & Roth IRAs (Outside the Practice)

Overview

Traditional IRAs and Roth IRAs exist independently of your practice. These are individual accounts you contribute to personally, rather than through your business.

Key Benefits of Traditional & Roth IRAs

• Simplicity: Easy to open at most financial institutions, minimal ongoing costs, and no complex paperwork.
• Accessibility: Anyone with earned income under certain IRS limits can contribute.
• Choice of Tax Treatment:
  • Traditional IRA: Contributions may be tax-deductible; you’ll pay taxes on withdrawals in retirement.
  • Roth IRA: Contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.

Disadvantages of Traditional & Roth IRAs

• Lower Contribution Limits: Annual caps are much smaller than SEP IRAs or 401k’s–only $7,000 for tax year 2025 (slightly more if you’re over 50 years old).
• Income Restrictions: Traditional IRAs and Roth IRAs have income phase-outs that may limit or prohibit direct contributions if you or your spouse earn above certain thresholds.

 

Choosing the Right Plan for Your Stage

For Solo Practitioners

If you want to keep admin simple and plan to remain solo long-term, a SEP IRA or Solo 401k might be ideal. If your income is modest, even a Traditional or Roth IRA can be an easy, no-hassle way to start saving.

For Practices Expecting to Grow

A Solo 401k can convert into a traditional 401k when you hire employees. If you have employees already, a 401k is often the most popular, versatile, and recruitment-friendly choice.

For High Earners Needing Big Tax Breaks

Consider adding a Cash Balance Plan alongside your 401k. This advanced strategy can help you put away substantially more each year, but it comes with increased cost and complexity.

For Brand New Practices or “Side Hustle” Practices

Consider making retirement plan contributions at the personal level, not through your business. Traditional or Roth IRAs have the lowest contribution limits, but are more than enough in many cases.

 

Practical Tips & Next Steps

Consult with a CPA, Accredited Retirement Plan Consultant (ARPC), or Financial Advisor

Retirement plans involve nuanced tax rules and contribution limits that change annually. A knowledgeable professional can guide you to a plan design that fits both your current and future practice structure.

Stay Compliant with Employee Eligibility

If you’re running a Solo 401k but hire full-time W-2 employees, you’ll need to convert your plan promptly. Non-compliance can lead to penalties and corrective contributions. Again, working with a competent professional can save you loads of stress and time.

Mind the Paperwork

401k plans require annual filings and tests like the IRS Form 5500 and nondiscrimination testing (unless it’s a Solo 401k or certain “safe harbor” plans). These filings are usually handled by a TPA but double-check before signing on the dotted line.

Cash Balance Plans require an actuary to certify funding levels each year.

Review Annually

As your practice grows or your personal financial situation changes, reassess your retirement plan. You can adjust contribution amounts, add more tax-advantaged layers (like a Cash Balance Plan), or switch structures entirely.

Think Long-Term

The most effective retirement strategy is consistently saving over time. Even smaller contributions early on can lead to significant growth thanks to compounding.

Conclusion

Selecting the right retirement plan for your private practice can make a tremendous difference in your short-term tax situation, long-term financial health, and peace of mind. Whether you’re a solo practitioner looking for a straightforward solution like a SEP IRA, aiming to expand with a robust 401k, or in a position to leverage a high-contribution Cash Balance Plan, you have options. Each plan offers unique benefits and responsibilities—from the administrative load to tax advantages and contribution flexibility.

Choose wisely and stay compliant. You’ll not only secure your own financial future, but also create a sustainable work environment—one that can attract and retain quality employees if you decide to grow. Pair that with consistent guidance from CPAs and financial advisors who understand the nuances of private practice ownership, and you’ll be well on your way to a prosperous, less stressful retirement.