When you work for yourself, nobody sets up a pension for you, so it is entirely on you, and the three tools built for exactly this are the SEP-IRA, the Solo 401(k), and the Roth IRA. For most self-employed tradespeople with an up-and-down income, a Solo 401(k) shelters the most money, a SEP-IRA is the simplest, and a Roth is the best place to start if you are early on or in a lower tax year. The other half of the picture, which catches a lot of people out late, is Social Security: every year you get paid cash and do not report it is a year that quietly shrinks your future benefit.
The three vehicles (2026)
- SEP-IRA. Contribute the lesser of 25% of your net self-employment earnings or $72,000. It is the simplest to run, with no annual IRS filing, and you can open it and pay in right up to your tax deadline (including extensions), which suits variable income. The trade-off: no catch-up contributions, and you cannot make an employee-style deferral, so at moderate incomes it shelters less than a Solo 401(k).
- Solo 401(k). For the self-employed with no full-time employees (a spouse is fine). You put in an employee deferral of up to $24,500 plus an employer profit share, up to $72,000 total, with catch-ups on top if you are 50 or over ($8,000, or $11,250 in the 60 to 63 band). It also allows a loan (up to 50% of your vested balance, capped at $50,000) and Roth contributions. The catch: you must set it up by December 31 of the contribution year.
- Roth IRA. Fund it with after-tax dollars, and growth and qualified withdrawals in retirement are tax-free, with no required minimum distributions. The limit is lower ($7,500 under 50, $8,600 at 50+), and there are income phase-outs (for 2026, single filers phase out between $153,000 and $168,000 of MAGI; married filing jointly between $242,000 and $252,000). You can fund a Roth on top of a SEP or Solo 401(k) up to those income limits.
What that looks like in practice: a self-employed electrician netting $80,000 in 2026 could shelter around $38,300 in a Solo 401(k) (about a $24,500 deferral plus roughly $13,800 employer share), versus about $13,800 in a SEP-IRA. Same income, very different amount put away, which is why the Solo 401(k) usually wins for moderate earners.
The Social Security trap for cash workers
Self-employment tax is 15.3% (12.4% Social Security plus 2.9% Medicare), double what a W-2 employee sees, because you pay both the worker and employer halves. The upside is that paying it earns you Social Security credits.
The mechanics for 2026: you earn one credit for every $1,890 of covered earnings, up to four a year, and you need 40 credits (about 10 years of taxed work) to qualify for a retirement benefit at all. The benefit is then based on your highest 35 years of earnings, so every year paid under the table shows up as a zero or a low number that drags the whole figure down. Full retirement age is 67 for anyone born in 1960 or later. You can start as early as 62 with a permanent reduction, or hold off to 70 and gain roughly 8% a year.
The practical takeaway: years of cash work do not just risk the IRS, they cost you your own retirement. Reporting your income builds the credits and the benefit. Check where you stand any time at ssa.gov/myaccount, and know it is never too late to start adding credits through documented work.
The move
Open something now, even small. A Roth IRA takes ten minutes to set up and is a fine start. As your income grows and steadies, add a SEP-IRA or a Solo 401(k) to shelter more, and get a CPA to run which one fits your numbers. The biggest mistake is waiting for a "good year" that never quite arrives.
Common questions
Can I open a SEP-IRA or Solo 401(k) if I work for myself with no employees?
Yes. Both are built for exactly that, and the Solo 401(k) is specifically designed for a self-employed person with no full-time employees (a spouse on the payroll is fine). A SEP-IRA also works for a one-person business and is the simplest to run, with no annual IRS filing. The Solo 401(k) usually shelters more at moderate incomes because it adds an employee-style deferral on top of an employer contribution. If you later hire full-time staff, a Solo 401(k) no longer fits and you would look at other plans. These are 2026 rules; confirm current details at irs.gov.
How many years do I need to have worked to qualify for Social Security?
You need 40 credits, which is about 10 years of taxed work, to qualify for a Social Security retirement benefit at all. In 2026 you earn one credit for every $1,890 of covered earnings, up to four credits a year, so a full year of reported self-employment income earns the maximum four. Years you get paid in cash and do not report earn no credits and show up as zeros that drag down the benefit, which is based on your highest 35 years of earnings. Check where you stand at ssa.gov/myaccount. Figures are for 2026; verify at ssa.gov.
Do retirement contributions lower my self-employment tax?
No. Contributing to a SEP-IRA, Solo 401(k), or Roth reduces your income tax (for the pre-tax accounts), but it does not reduce your self-employment tax. Self-employment tax of 15.3% is calculated on your net business profit before these retirement deductions, so putting money into a plan does not shrink that bill. What a pre-tax contribution does is lower the income tax layered on top. A Roth gives no upfront deduction at all, since it is funded with after-tax dollars, in exchange for tax-free growth later. This is general guidance; confirm the current treatment at irs.gov.
When do I have to set up a Solo 401(k) by?
You generally must establish a Solo 401(k) by December 31 of the year you want to contribute for, even if you fund it later. That is the key difference from a SEP-IRA, which you can both open and fund right up to your tax filing deadline, including extensions, the following year. So if a strong year has you wanting to shelter more, a Solo 401(k) needs to exist before the year ends, while a SEP gives you until you file. Plan the Solo 401(k) ahead rather than at tax time. These deadlines are for 2026; verify at irs.gov.
Is it too late to start a retirement account in my 50s?
No, and the rules actually favor older savers. From age 50 you can add catch-up contributions on top of the normal limits, an extra $8,000 to a Solo 401(k) in 2026, or $11,250 in the 60-to-63 band, which lets you put away meaningfully more in your final working years. On the Social Security side, it is also never too late to keep adding credits through documented, reported work, and each higher-earning year can replace a zero in your record. The biggest mistake is waiting for a perfect year that never comes. These are 2026 figures; confirm current limits at irs.gov and ssa.gov.
The honest bit
- These are 2026 federal figures and they change most years. Confirm current limits at irs.gov and ssa.gov before you contribute.
- Which vehicle is right depends on your income, your tax bracket, and whether you have employees. This is general guidance, not tax or investment advice. A CPA who knows the trades earns their fee here.
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Templates you might need
Sources
- IRS - Retirement plans for self-employed people · The plan types available to somebody with no employer behind them, and that a self-employed person contributes as both employer and employee
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