Planning Retirement After Switching From W-2 to 1099 Locums Work

The biggest retirement mistake physicians make after going 1099 locums is pretending they’re still W‑2 employees. You are not. The rules, the risks, and the opportunities have all changed.

If you just switched—or are about to switch—from W‑2 employed work to 1099 locums, your old “set it and forget it” 401(k) routine will not cut it. But you also have tools now you never had as an employee, if you bother to use them.

Let’s walk through what you actually need to do, step by step, in the real world. Not theory. Not “max out everything” platitudes. A concrete sequence you can follow in the next 12 months.

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Step 1: Accept That No One Is Withholding For You Anymore

When you were W‑2, someone else:

• Withheld your taxes
• Auto-funded your 401(k) every paycheck
• Maybe gave you a match
• Paid half your FICA

That’s all gone.

As a 1099 locums doc, you’re now:

• The employer
• The employee
• The retirement plan sponsor
• The unpaid compliance officer

If you do nothing, here’s what usually happens—I’ve seen it more than once:

1. First year of 1099 goes great. Big paychecks.
2. You “mean to” set up a retirement plan but do not. You throw a bit into a brokerage account.
3. Next April, your CPA tells you that you owe a $90,000 tax bill. You nearly choke.
4. You realize you missed your chance to shelter a big chunk of income the prior year. Too late.

Do not be that story.

Before you obsess over which retirement plan to pick, you need to carve off money for:

• Taxes (federal, state, and self-employment)
• Retirement
• Business expenses

Here’s a simple starting framework if you are in a high tax state and high bracket:

• 30–35% of gross: park in a tax bucket (separate high-yield savings account)
• 15–25%: target for retirement savings (some tax-advantaged, some taxable)
• Whatever’s left: living expenses + lifestyle

You’ll refine the percentages once you know your actual numbers, but if you’re not siphoning money off each payment immediately, you’re already behind.

Set this up today:
Every time a locums check hits:

• 30–35% → “Tax” savings account
• Fixed amount (e.g., $5k, $10k) → “Retirement” account (temporary landing spot until invested in the right plan)

Then you deal with the details below.

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Step 2: Map Out Your Locums Income and Entity Structure

Your retirement options depend on two things:

1. How you’re paid: direct 1099 under your name vs via an entity (LLC/S‑corp)
2. How many places you work: single locums agency vs multiple contracts

If you don’t have an entity yet, fine, but understand this:

• For retirement plan purposes, a sole proprietor (you with a Schedule C) can still run a solo 401(k), SEP‑IRA, etc.
• If you move to an S‑corp later, the rules shift slightly because contributions are based on W‑2 wages from your own corporation, not all your business profit.

Here’s the basic landscape:

Plan Type	Max 2025 Contribution*	Based On	Admin Complexity
Solo 401(k)	Up to $69,000	Net earnings or W-2	Moderate
Roth Solo 401(k)	Within same $69,000 cap	Same as above	Moderate
SEP-IRA	Up to $69,000	20% of net earnings	Low
SIMPLE IRA	$16,000 + match	Net earnings	Low
Taxable Account	Unlimited	N/A	Very Low

*Assuming you’re under the catch-up age; limits adjust over time.

If you’re making serious locums income (let’s say >$150k), SEP-only is usually leaving money on the table. The solo 401(k) gives you more flexibility and higher contributions at lower income levels.

We’ll get there.

First, you need a realistic income estimate:

• Pull your last 3–6 months of locums pay
• Annualize it, but be conservative (locums ebbs and flows)
• Decide: Do you plan to stay at this volume long term, ramp up, or use locums as a temporary bridge?

Your retirement plan should match your intent, not just your current chaos.

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Step 3: Prioritize the Accounts in the Right Order

You’ve got several possible buckets now. Here’s the general order of operations I recommend for most 1099 locums physicians:

1. Emergency fund: 3–6 months of personal expenses, plus 1–2 months of business expenses. Locums is volatile.
2. Health Savings Account (HSA) if you’re on a high deductible health plan and have access: triple-tax-advantaged, often the best retirement account no one takes seriously.
3. Solo 401(k) (or SEP if you won’t do the paperwork): main retirement workhorse.
4. Backdoor Roth IRA (if income is high and you don’t have pre-tax IRAs hanging around that cause pro-rata issues).
5. Taxable brokerage account: because your retirement needs are probably bigger than contribution limits.

Notice I didn’t say “figure out every nuance first.” You can open a taxable brokerage account and start investing in a basic index fund now, while the solo 401(k) paperwork catches up.

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Step 4: Choose Between Solo 401(k) and SEP‑IRA Like an Adult, Not a Sales Brochure

Most banks and generic advisors push SEPs because they’re easy. Easy is not the main goal. Efficient and flexible is.

Solo 401(k) vs SEP‑IRA for a pure 1099 locums doc (no employees):

Solo 401(k) usually wins because:

• You can contribute both as “employee” and “employer.”
• You can hit the max contribution at lower income levels.
• You can often include a Roth component for the employee side.
• It preserves your ability to do backdoor Roth IRAs (no large pre-tax IRA balance to trip the pro-rata rule).

SEP‑IRA is simpler but more limited:

• Employer-only contributions (no employee deferral).
• Generally 20% of net self-employment income (after half SE tax deduction).
• Treated as a traditional IRA, which messes up backdoor Roth unless you roll it into a 401(k) later.

Here’s a quick sense of how fast you can get to higher contributions with a solo 401(k):

Solo 401(k) vs SEP Contribution at Different Net Incomes

Category	Value
$100k	29200
$200k	46400
$300k	69000

(Example: At $100k net income, a SEP might allow ~20k, while a solo 401(k) can often push closer to that 29k range because of the employee deferral.)

If you are serious about maximizing retirement savings as a 1099 locums physician, the correct default is:

• Open a solo 401(k) at a low-cost custodian (Fidelity, Vanguard, Schwab, etc.)
• Only use a SEP if you refuse to deal with 401(k) paperwork or already accidentally opened one and want a lazy year.

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Step 5: Actually Set Up the Solo 401(k) — Timeline Matters

Here’s what trips people up:
You cannot just wake up in April after your huge 1099 year and decide to open a solo 401(k) for last year at most custodians. The plan usually must be established by December 31 of the tax year, even though you have until your tax filing deadline (plus extension) to fund most of the contribution.

So the playbook for your first locums year looks like this:

1. Now (anytime before Dec 31):

   • Decide on solo 401(k) vs SEP.
   • If solo 401(k), pick a custodian and submit the opening documents.
   • Set contribution “intent”: you don’t need exact dollar amounts yet, but know you’re committing to use it.

2. By tax filing deadline (April 15 or October if extended):

   • Finalize your Schedule C net income or S‑corp W‑2 number.
   • Have your CPA calculate max allowable contributions (employee + employer).
   • Move cash from your business/tracking account into the solo 401(k) before the deadline.

If you are reading this in October/November and you still haven’t opened a plan, stop wasting time. Get the solo 401(k) documents in this week. Even if you’re not sure how much you’ll contribute. You just need the shell in place.

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Step 6: Decide Pre-Tax vs Roth Carefully (Not Emotionally)

The Roth solo 401(k) pitch is seductive: “Tax-free forever!” Fine. But if you’re currently paying a 37% federal + state marginal rate, giving up that deduction is not cute.

You should not pick pre-tax vs Roth based on vibes. Use your actual situation:

Strong reasons to prioritize pre-tax 401(k):

• Top brackets now, likely lower in retirement
• High locums income + spouse working
• You’re also in a high-tax state (CA, NY, NJ, etc.)
• You need to reduce current tax burden and keep cash flow strong while you stabilize locums work

Reasons to use Roth 401(k) for at least the employee portion:

• Moderate current marginal rate, and you expect higher later (e.g., early/mid-career and revenue likely to spike)
• You’ve already got a big pre-tax nest egg from prior W‑2 401(k)s
• You value flexibility in retirement and RMD concerns

Most locums docs I see end up with a mix:

• Employer contribution: always pre-tax
• Employee deferral: sometimes split (part pre-tax, part Roth), adjusted each year based on income and tax picture

So do not get stuck in “Roth good, pre-tax bad” Instagram logic. Look at your marginal rate now, and think about what it might be with a lower-income retirement.

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Step 7: Handle Old W‑2 401(k)s the Smart Way

You probably have one (or several) 401(k)s from prior employed jobs. Don’t leave them scattered.

Options:

• Leave it where it is (fine if low-cost and decent funds)
• Roll into your new solo 401(k) (often preferred — consolidates and avoids IRA complications)
• Roll into a traditional IRA (usually a bad move if you want to do backdoor Roth each year)

If your goal is to use backdoor Roth IRA annually, you don’t want a big pre-tax IRA balance. The IRS looks at all your pre-tax IRAs combined when taxing Roth conversions. 401(k)s, on the other hand, don’t count in that formula.

So the cleanest structure for a high-income locums doc planning to use backdoor Roth:

• Old 401(k) → rolled into solo 401(k)
• No large pre-tax IRAs sitting around
• Each year: non-deductible traditional IRA contribution → convert to Roth IRA (backdoor)

You’d be surprised how many high earners get this wrong because someone told them “just roll everything into an IRA, it’s easier.”

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Step 8: Do a Reality Check: Are You Actually Saving Enough?

Locums often feels like “I’m making so much more money now.” That’s not the real question. The real question is:

“How much am I keeping and compounding for future me?”

You need an actual retirement savings target. Not a vibe.

Basic framework:

• Assume you want to replace at least 50–70% of your pre-retirement gross (sometimes more, sometimes less depending on debt, kids, lifestyle).
• For many physicians starting serious saving in mid-30s to early 40s, that’s 20–30% of gross income annually for retirement.

So if you’re pulling $350,000 as a 1099 locums doc, you’re probably targeting $70,000–$100,000 per year into:

• Solo 401(k) (pre-tax + Roth)
• Backdoor Roth IRA
• HSA (if eligible)
• Taxable brokerage

If that number makes you queasy, good. It means you’re finally looking at the real math.

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Step 9: Build a Simple System, Not a 12-Tab Spreadsheet Fantasy

You don’t need a PhD in Excel to run this. You need a repeatable, boring system. For a 1099 locums doc, something like:

1. One business checking account

   • All locums income goes here
   • All business expenses (CME, licenses, travel, equipment) come out
   • From here, you sweep to tax savings and retirement

2. One high-yield savings account for taxes

   • 30–35% of each payment lands here
   • This is not for vacations
   • This plus quarterly estimated payments keeps you out of IRS hell

3. One solo 401(k)

   • Invest in 2–4 broad, low-cost index funds (US stock, international stock, bonds)
   • Stop trying to pick winners. You’re busy and human.

4. One taxable brokerage account

   • Same basic funds as the 401(k)
   • This is your overflow retirement + flexibility fund

Here’s a very simple flow:

Cash Flow and Retirement Setup for 1099 Locums

Step	Description
Step 1	Locums Income
Step 2	Business Checking
Step 3	Tax Savings 30-35%
Step 4	Personal Checking
Step 5	Solo 401k Contributions
Step 6	Backdoor Roth IRA
Step 7	Taxable Brokerage

If your current life setup looks nothing like this and more like deposits going into random accounts, Venmo transfers, and credit cards everywhere, you do not have a retirement problem; you have a systems problem.

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Step 10: Don’t Ignore Legal and Liability Angles

Retirement planning for 1099 locums isn’t just which account you pick. You’re also stepping into new legal and risk territory:

• Malpractice coverage: Claims-made vs occurrence, tail coverage when you switch gigs, etc. This matters because a lawsuit late in your career can blow up your retirement plan.
• Entity choice: Sole proprietor vs LLC vs S‑corp. It doesn’t magically shield you from malpractice, but it changes how you pay yourself, what’s considered wages vs distributions, and sometimes what you can contribute.
• Contracts: Cancellation clauses, guaranteed hours, and rate changes affect your cash flow and therefore your ability to fund retirement consistently.

I’ve seen locums docs suspend contributions for a year because a hospital abruptly cut shifts or changed agencies. You can plan for volatility by:

• Keeping a bigger-than-average cash buffer
• Not building your fixed lifestyle on your highest-earning year
• Choosing retirement contributions you can dial up or down without penalty (e.g., flexible solo 401(k) employer contributions, taxable investing)

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Step 11: When to Pull in Help (And What Kind)

If your “team” is currently you and TurboTax, and you’re crossing into mid-six-figure 1099 income, that’s a problem.

You likely need:

• A CPA who actually understands self-employed physicians, entity taxation, and retirement plans. Not your cousin’s generalist tax guy who does restaurants and Etsy shops.
• Optionally, a fee-only financial planner (not commission-based, not a “free” advisor who only gets paid when they stuff you into mutual funds with 1% expense ratios).

You are not outsourcing thinking; you’re outsourcing mechanics and optimization:

• Calculating max contribution across multiple income streams
• Timing contributions with extensions
• Modeling pre-tax vs Roth tradeoffs
• Ensuring your solo 401(k) gets its required Form 5500‑EZ filed when large enough
• Avoiding dumb mistakes like triggering pro-rata issues with Roth conversions

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Step 12: Make a 12-Month Retirement Action Plan

Let’s make this concrete. Over the next year, your locums-retirement to‑do list might look like:

Months 1–2:

• Open business checking + dedicated tax savings account.
• Estimate annual locums income.
• Set automatic transfers: 30–35% to tax savings; fixed amount monthly toward future retirement contributions.

Months 2–3:

• Decide solo 401(k) vs SEP.
• If solo 401(k), open the plan and get the documents signed before year-end.
• Choose basic low-cost index funds and default allocations.

Months 3–6:

• Meet with a CPA who understands 1099 physicians.
• Start making quarterly estimated tax payments.
• Consolidate old 401(k)s into your solo 401(k) if appropriate.

Months 6–9:

• Increase retirement contribution rate if locums income turns out higher than expected.
• Set up backdoor Roth IRA process if it fits your tax picture.
• Keep business and personal finances cleanly separated.

Months 9–12:

• Final check: Is your solo 401(k) actually open for this tax year?
• Project your net income and confirm max contribution with CPA.
• Fund as much as cash flow reasonably allows by tax filing deadline.

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You don’t have to become a retirement nerd to do this right. You do have to stop thinking like a W‑2 employee.

You’re the employer now. That’s power, if you use it.

Here’s your next step today:
Pull up your last three months of locums payments and write down the total. Then, open a separate high-yield savings account labeled “TAX & RETIREMENT HOLDING” and move 30% of that total into it. Once that money is out of your day-to-day reach, you’ve created the space to actually set up the right retirement plan instead of scrambling when the IRS and your future self both come calling.