As an independent contractor in the trades, you’re used to building and fixing things that last. But are you building a financial future that’s just as durable?
The hard truth: Many self-employed tradespeople reach retirement age with inadequate savings. Without an employer-sponsored 401(k) or pension plan, the responsibility falls entirely on your shoulders.
The good news? Independent contractors have access to retirement plans with contribution limits that far exceed what most employees can save—potentially allowing you to build wealth faster while significantly reducing your tax burden now. In fact, these retirement contributions represent one of the most valuable tax deductions available to tradespeople.
This guide compares the major retirement plans available to self-employed trade workers, with a special focus on the two powerhouse options: SEP IRAs and Solo 401(k)s.
The Retirement Challenge for Tradespeople
Before diving into specific plans, let’s address the unique retirement planning challenges faced by those in the trades:
- Inconsistent income: Seasonal work and project-based pay can make regular contributions difficult
- Physical demands: Many trades take a toll on the body, potentially forcing earlier retirement
- Self-employment tax burden: Without employer tax sharing, you face higher overall tax rates
- Business reinvestment competing with retirement: Tools and equipment often take priority over savings
- Later career start: Apprenticeship years may delay serious retirement saving
These challenges make strategic retirement planning even more critical for tradespeople. The right retirement plan doesn’t just secure your future—it can substantially reduce your current tax bill.
Retirement Plan Options at a Glance
Here’s a quick comparison of the major retirement plans available to self-employed contractors in 2025:
| Plan Type | 2025 Contribution Limit | Employer Contribution | Catch-Up (Age 50+) | Setup Complexity | Investment Options |
|---|---|---|---|---|---|
| Traditional/Roth IRA | $7,000 | No | $1,000 | Very Simple | Unlimited |
| SEP IRA | $73,500 or 25% of net income | Yes (your business) | No | Simple | Unlimited |
| Solo 401(k) | $69,000 total | Yes, up to 25% of compensation | $7,500 | Moderate | Limited by provider |
| SIMPLE IRA | $16,000 employee contribution | Yes, required | $3,500 | Moderate | Limited |
Now, let’s focus on comparing the two most powerful options for most independent contractors: SEP IRAs and Solo 401(k)s.
SEP IRA: Simplified Employee Pension
A SEP IRA (Simplified Employee Pension Individual Retirement Arrangement) is often the first retirement plan self-employed tradespeople consider due to its simplicity and generous contribution limits.
SEP IRA Advantages
1. Simple Setup and Administration
- No annual filing requirements with the IRS
- Minimal paperwork to establish
- Available at most major brokerages with no setup fees
- Can be established and funded up to your tax filing deadline (including extensions)
2. Generous Contribution Limits
- 25% of your net self-employment income up to $73,500 (2025)
- Contributions are tax-deductible, reducing your current tax burden
3. Flexible Contributions
- No requirement to contribute every year
- Contribution amounts can vary based on your cash flow
- Perfect for businesses with variable income
4. Investment Flexibility
- Invest in nearly anything: individual stocks, bonds, mutual funds, ETFs
- Not limited to a provider’s investment menu like some 401(k) plans
SEP IRA Disadvantages
1. No Catch-Up Contributions
- Unlike other retirement plans, no additional contributions for those over 50
2. Employee Impact
- If you have employees, you must contribute the same percentage for eligible employees as you do for yourself
- Can become expensive as your business grows and adds employees
3. No Roth Option
- SEP contributions can only be made to traditional (pre-tax) accounts
- No option for tax-free growth through Roth contributions
4. Potentially Lower Contribution Limits
- For lower income years, the 25% limit may result in lower maximum contributions than a Solo 401(k)
Solo 401(k): Maximum Flexibility and Contributions
Also called an Individual 401(k) or One-Participant 401(k), the Solo 401(k) has gained popularity among self-employed professionals due to its potentially higher contribution limits and greater flexibility.
Solo 401(k) Advantages
1. Highest Potential Contribution Limits
- Dual contribution structure: employee contribution plus employer contribution
- As both employer and employee, you can contribute:
- Employee contribution: Up to $23,000 (2025) regardless of income level
- Employer contribution: Up to 25% of compensation
- Total limit: $69,000 for 2025 (plus catch-up contributions)
2. Catch-Up Contributions
- Additional $7,500 in employee contributions if you’re 50 or older
- Pushes potential total to $76,500 for those 50+
3. Loan Provisions
- Many Solo 401(k) plans allow you to borrow against your balance
- Typically up to 50% of the balance or $50,000, whichever is less
- Can provide emergency access to funds without permanent withdrawal
4. Roth Option
- Employee contributions can be made as Roth (after-tax) contributions
- Allows for tax-free growth and tax-free qualified withdrawals in retirement
5. Better for Lower Income Years
- Can contribute a higher percentage of income at lower income levels compared to SEP IRA
Solo 401(k) Disadvantages
1. More Complex Administration
- More paperwork to establish
- Annual filing requirement (Form 5500-EZ) once balance exceeds $250,000
- Must be established by December 31st of the tax year (though funding can occur later)
2. Potential Provider Limitations
- Investment options limited to what your plan provider offers
- Some providers charge setup and/or maintenance fees
- Loan provisions and Roth options not available with all providers
3. No Employees Allowed
- Only you and your spouse can participate
- Not suitable if you plan to hire full-time employees (though contractors are fine)
4. More Complex Contribution Calculations
- Calculating the maximum contribution requires understanding both employee and employer contribution limits
Which Plan Is Right for You? Decision Factors
The best retirement plan depends on your specific situation. Consider these factors when making your decision:
Choose a SEP IRA if:
- You value simplicity above all else
- You’re setting up a plan near the tax deadline (since SEPs can be established later)
- You have, or plan to have, employees
- Your net income is high enough that the 25% limit allows you to reach your desired contribution
- You want to avoid annual filing requirements
Choose a Solo 401(k) if:
- You want to maximize contributions, especially at lower income levels
- You’re over 50 and want to make catch-up contributions
- You want the option to make Roth contributions
- You might need to access funds before retirement through a loan provision
- You don’t have (and don’t plan to have) full-time employees other than your spouse
- You’re comfortable with slightly more administrative work
Real-World Example: Compare the Plans
Let’s look at how these plans compare for a self-employed electrician with $100,000 in net business income:
SEP IRA Contribution
- Maximum contribution: $25,000 (25% of $100,000)
- Tax savings (24% bracket): $6,000
Solo 401(k) Contribution
- Employee contribution: $23,000
- Employer contribution: $18,587 (Approximately 18.6% due to self-employment tax adjustments)
- Total contribution: $41,587
- Tax savings (24% bracket): $9,981
In this scenario, the Solo 401(k) allows for a significantly higher contribution and greater tax savings.
Getting Started: How to Open Either Account
Opening a SEP IRA
- Choose a provider: Major brokerages like Fidelity, Vanguard, Charles Schwab, and E*TRADE offer no-fee SEP IRAs
- Complete IRS Form 5305-SEP: Most providers handle this as part of their application
- Fund your account: Make contributions up to your tax-filing deadline
- Select investments: Choose from the provider’s available options
Opening a Solo 401(k)
- Choose a provider: Compare options from Fidelity, Vanguard, Charles Schwab, E*TRADE, or specialized providers
- Complete adoption agreement: More extensive than SEP paperwork
- Obtain an EIN: If you don’t already have one for your business
- Set up both employer and employee components
- Establish plan by December 31st of the tax year for which you want to contribute
- Fund by tax-filing deadline (employee contributions technically by year-end, but often allowed later)
Beyond SEP and Solo: Other Retirement Options
While SEP IRAs and Solo 401(k)s offer the highest contribution limits, other options may better suit certain situations:
Traditional or Roth IRA
Even with a SEP or Solo 401(k), you can still contribute to a personal IRA (subject to income limitations for deductibility or Roth eligibility).
Best for: Supplementing other retirement plans or those just starting out
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA allows for both employer and employee contributions with less administration than a 401(k).
Best for: Self-employed individuals with a few employees who want a balance between contribution limits and administrative simplicity
Defined Benefit Plan
For high-income tradespeople approaching retirement who want to maximize tax-deferred savings.
Best for: Older trade business owners with consistent high income and few/no employees
Common Questions About Retirement Plans for Tradespeople
“I’m just starting my business. Should I worry about retirement now?”
Yes! The sooner you start, the more time your money has to grow. Even small contributions in the early years can grow substantially over time.
“What if I have a busy month and can’t contribute?”
Both SEP IRAs and Solo 401(k)s allow for flexible contribution schedules. You can contribute when cash flow allows, up to your annual limit.
“Can I have a retirement plan if I work part-time for an employer and do trade work on the side?”
Absolutely. Your self-employment retirement plan contribution limits will be based on your self-employment income, separate from any employer plan.
“What happens to my retirement plan if I later hire employees?”
A Solo 401(k) would need to be converted to a traditional 401(k) with additional requirements. A SEP IRA could continue, but you’d need to make proportional contributions for eligible employees.
“How do these plans affect my ability to get construction loans or other business financing?”
Retirement assets are generally viewed positively by lenders as they indicate financial stability. However, these assets are typically not counted as available collateral unless you take distributions (which usually incurs penalties).
The Strategic Approach: Combining Tax Planning with Retirement Saving
Retirement contributions serve a dual purpose for tradespeople: building future wealth while dramatically reducing current tax liability. To maximize both benefits:
- Work with a tax professional: Ideally someone familiar with self-employed contractors
- Make quarterly tax planning a habit: Review your retirement contribution strategy as part of your quarterly estimated tax routine
- Coordinate with other tax strategies: Combine retirement contributions with other valuable tax deductions for tradespeople like vehicle expenses, tool depreciation, and home office deductions
- Consider timing large equipment purchases: Balance major business investments with retirement contributions to optimize both tax benefits and business growth
Taking Action: Your Retirement Roadmap
Ready to secure your financial future? Follow these steps:
- Calculate your projected net income for the year
- Determine which plan type best suits your situation based on the factors we’ve discussed
- Research providers and compare fees, investment options, and features
- Open your chosen account before the applicable deadline
- Create a contribution schedule that aligns with your cash flow
- Revisit your plan annually to ensure it still meets your needs
Remember, the best retirement plan is one you’ll actually use consistently. Start small if necessary, but start now. Your future self—the one who can finally put down the tools and enjoy the fruits of decades of hard work—will thank you.
Have you already set up a retirement plan for your contracting business? Share your experience in the comments below—what’s working, what’s challenging, and what questions do you still have?
Disclaimer: This article contains general financial information and should not be construed as personalized investment or tax advice. Tax laws and retirement regulations change frequently, and individual situations vary. Always consult with qualified financial and tax professionals regarding your specific circumstances before implementing any financial strategy.