Which Retirement Plan Should You Choose?

As a therapist, you work hard for your money. But did you know that you have multiple options when it comes to saving for your retirement? From simple plans like traditional IRAs and SEP IRAs to more complex investment options like 401(k)s and Cash Balance Plans, there’s plenty to choose from. But how do you know what choice is best for you?

As the managing partner of a CPA firm specializing in supporting mental health professionals, I’ve spent over 20 years helping therapists just like you maximize your bookkeeping, tax strategies, and financial clarity, so that when the time comes, you’ll be ready for retirement.

First, some basics: why do retirement plans matter? As a therapist, you know how important it is to help others plan for their future. But what about your financial future? Whether you’re a new therapist, starting your own practice, or considering transitioning from a solo therapy practice to a group practice, choosing the right retirement plan is crucial for your long-term financial security, and 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.

Beyond just having “a place to put your 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. 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, except now you get to keep that money in your own account, helping you build long-term wealth. Because that money is still in your possession, 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.

To demystify the major retirement plan options available to private practice owners, I’ll give you a breakdown of how seven different major plans works, what kind of practice owner benefits the most from each type, and how to know when a particular plan no longer fits your financial needs.

The Seven Major Plans

SEP IRAs. 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 your employees. Its key benefits include no administrative costs or annual maintenance fees (unlike many 401(k) options) and high contribution limits (for tax year 2025, you can contribute the lesser of $70,000 or 25 percent of your self-employed income—or W-2 if you’re an S-Corp). You can also change your contribution amount or percentage annually based on your practice’s performance, giving you great flexibility.

Solo therapists who decide to bring on full-time W-2 employees (who are non-owners or a non-spouse) should consider switching from a SEP IRA. If you hire employees, you must contribute the same percentage to their retirement as you do for yourself, which can become prohibitively expensive if you’re contributing a high percentage. In this case, you’ll often roll your existing SEP IRA money into another plan, like a 401(k), and close out the SEP plan.

401(k) Plans (Solo and Traditional). When people think “retirement plan,” they usually imagine a 401k, and for good reason: 401k plans are versatile, widely recognized by employees, and can significantly reduce tax liabilities through deductible contributions.

Solo 401(k)s are for owner-only practices, ideal if you’re the only full-time employee in the business, or you employ only your spouse. Its key benefits include high contribution potential. Because you’re technically both the employer and an 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, that’s $70k, which is the same limit as a SEP IRA. If you’re over 50 years old, you can contribute slightly more. Solo 401(k)s also offer flexibility, allowing you to change your contribution amount each pay period if the need arises.

Traditional 401(k)s, meanwhile, are best for growing or larger practices. Once you hire employees, you’ll need a group 401(k) structure if you want to continue with a 401(k)-type plan. Key benefits include the fact that these plans are very appealing to employees, given that they usually include an employer match—an attractive benefit when you’re competing for talented therapists. This plan also offers customization, as you can work with a Third-Party Administrator (TPA) to design employer matching formulas, vesting schedules, and more. It’s important to note that with the traditional 401(k), you can expect to pay some administrative fees for annual filings (IRS Form 5500, for example) and compliance testing, especially once you have non-owner employees.

SIMPLE IRAs. The SIMPLE IRA is often described as a “lighter” version of a 401(k) for small businesses. Just like a 401(k), 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. Although a SIMPLE IRA is generally cheaper to set up and maintain than a full-fledged 401(k) and offers a straightforward employer match (you can choose between matching a percentage of your employees’ contributions—commonly up to 3 percent—or contributing a flat 2% of salary for each eligible employee), there are several downsides: more administrative burden for business owners, who will be coordinating pay payroll deductions and ensuring compliance, and lower allowed contributions than 401(k)s (contribution limits for SIMPLE IRAs are set at $16,500 for tax year 2025 compared to $23,500 for 401(k)s, although in both cases, employees 50 and older can contribute slightly more).

Generally, I don’t recommend SIMPLE IRAs. While materially similar to 401(k)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, and in my opinion, managing a SIMPLE IRA is in direct opposition to that goal. They are less expensive though, so whether you choose this plan will be based on whether you’re willing and able to manage the extra work involved.

Cash Balance Plans. A Cash Balance Plan is a type of defined benefit plan, functioning more like a traditional pension and usually implemented alongside a 401(k) plan. Setting them up is extremely complex and they’re 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. Key benefits include, being able to potentially contribute over $400,000, based on your age and income—which is more than five times the amount you can contribute in any other plan. But there are important considerations, like expensive administration costs and complexity. You’ll need an actuary—usually supplied by a Third Party Administrator (TPA)—to calculate minimum funding requirements. They’re also a long-term commitment: Ideally, you should maintain a Cash Balance Plan for at least three to five years, as shutting one down prematurely can lead to extra fees or IRS scrutiny. Still, these may be good plans for established practices with very high incomes or owners looking for large tax deductions or the chance to significantly catch up on retirement savings.

Traditional and Roth IRAs. 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 include simplicity: these accounts are easy to open at most financial institutions, usually have zero ongoing costs, and no complex paperwork. They’re also very accessible, as anyone with earned income under certain IRS limits can contribute.

Whether you choose a traditional or Roth IRA depends on how you’d like to pay your taxes. With the traditional IRA, your contributions may be tax-deductible, and you’ll pay taxes on withdrawals in retirement. With the Roth IRA, contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.

These plans do have some limitations, however, including lower contribution limits (annual caps are much smaller than SEP IRAs and 401(k)s—only $7,000 for tax year 2025, slightly more if you’re over 50 years old) and income restrictions (traditional IRAs and Roth IRAs have income phase-outs that may limit or prohibit contributions if you or your spouse are above certain income thresholds).

Choosing the Right Plan for You

So now that you know about the seven major retirement plans for therapists, how do you decide which is right for you? If you haven’t made up your mind yet, here are my recommendations.

For solo practitioners who want to keep their administrative tasks simple and plan to remain solo long-term, a SEP IRA or solo 401(k) might be ideal. If your income is modest, just opening a traditional or Roth IRA can be an easy, no-hassle way to start saving.

For practices expecting to grow, a solo 401(k) can convert into a traditional 401(k) when you hire employees. If you have employees already, a 401(k) is often the most popular, versatile, and recruitment-friendly choice.

For ultra-high earners who need big tax breaks, consider adding a Cash Balance Plan alongside your 401(k). This advanced strategy can help you put away substantially more each year—but again, it does come with additional costs and complexity.

For brand new practices or “side hustle” practices, consider making retirement plan contributions at the personal level, not through your business. Traditional and Roth IRAs have the lowest contribution limits, but are more than sufficient in many cases.

Regardless of which plan you’re leaning toward, there are also some practical tips and next steps to consider. First, it’s always a good idea to first 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.

Second, make sure you’re staying compliant with employee eligibility. If you’re running a Solo 401(k) 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.

Third, mind the paperwork. 401(k) plans require annual filings and tests like IRS Form 5500 and nondiscrimination testing (unless you have 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.

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

Fifth, make sure you’re thinking for the long-term. The most effective retirement strategy is consistently saving over time. Thanks to compounding interest, even smaller contributions early on can lead to significant growth.
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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 401(k), 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.

By choosing wisely and staying 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. Best of luck!