Retirement Plans for Self-Employed Tradespeople: SEP IRA, Solo 401(k), and Defined Benefit Options

A self-employed plumber, electrician, or HVAC business owner with no employees (or only a spouse on payroll) has three real retirement plan options once profits reach a meaningful level: a SEP IRA, a Solo 401(k), or, for a high-earning owner in their fifties or older, a defined benefit plan capable of sheltering well over $100,000 a year. Which one wins depends on income level, age, and whether the owner wants the flexibility to skip a contribution in a slow year or the ability to shelter the maximum amount possible every year regardless of cash flow.

How does a SEP IRA work, and who’s it best for?

A Simplified Employee Pension (SEP) IRA is the simplest plan to set up and maintain, governed by IRC 408(k). A self-employed tradesperson contributes a percentage of net self-employment income, and the plan requires no annual filing (no Form 5500) as long as it covers only the owner (and any eligible employees, discussed below).

• The contribution limit is 25% of compensation, capped at $72,000 for 2026. For a self-employed individual (rather than an S-corp employee receiving a W-2), the actual calculation nets to roughly 20% of net self-employment income before the self-employment tax deduction, because the 25% rate applies after subtracting the plan contribution itself and half of self-employment tax from the income base, a circular calculation the IRS’s worksheets handle but that trips people up doing it by hand.
• The deadline is generous. A SEP IRA can be opened and fully funded as late as the business’s tax return due date, including extensions, meaning a trades business owner can wait until the following September or October (with a filed extension) to decide the contribution amount based on the prior year’s actual results. This is the single biggest practical advantage of a SEP over a Solo 401(k), which requires the plan itself to be established by the end of the tax year (though the employer contribution can still be made up until the extended filing deadline).
• The tradeoff: if the business has employees other than the owner (and, for a sole proprietor, a spouse), the SEP generally requires contributing the same percentage of compensation for every eligible employee, not just the owner. This can get expensive fast for a trades business with several W-2 employees, which is exactly why a growing trades business with staff often moves toward a 401(k)-based plan with more flexible employee eligibility and vesting rules instead.

How does a Solo 401(k) work, and why does it beat a SEP?

A Solo 401(k) (also called an individual 401(k) or one-participant 401(k)) is available to a self-employed business owner with no full-time employees other than a spouse. It combines two separate contribution types under one plan, governed by IRC 401(k) and IRC 415(c).

• Employee elective deferral: up to $24,500 for 2026 (or 100% of compensation if lower), regardless of the 25%-of-income calculation that governs the employer side. This deferral can be made dollar-for-dollar up to the limit even at a relatively modest income level, which is why a Solo 401(k) shelters meaningfully more money than a SEP IRA at lower profit levels.
• Employer profit-sharing contribution: up to 25% of compensation (same net calculation as the SEP), combined with the employee deferral up to the overall $72,000 limit for 2026.
• Catch-up contributions for owners 50 and older add real capacity. A standard $8,000 catch-up applies at 50 and older; a newer, larger $11,250 catch-up (created by SECURE 2.0) applies specifically to ages 60 through 63, allowing a total employee deferral of $35,750 for someone in that four-year window, on top of the employer contribution.
• The plan must be established by the end of the tax year, a real deadline (unlike the SEP’s extended-return-due-date flexibility), though the actual contribution can still be made up until the extended filing deadline. A trades business owner deciding in December they want a Solo 401(k) for that same tax year needs to act before December 31, not wait until tax season.

When does a defined benefit plan make sense?

A defined benefit plan flips the calculation: instead of contributing a percentage of income, the plan targets a specific annual retirement benefit (up to $290,000 for 2026 under IRC 415(b)), and an actuary calculates the contribution required each year to fund that target benefit by retirement age. For an owner with strong, stable income later in their career, this can push deductible contributions well past $100,000, sometimes past $200,000, in a single year.

• Age is the biggest driver of contribution capacity. A 55-year-old owner targeting the maximum benefit at a typical retirement age has fewer years to fund it than a 35-year-old would, which means the required annual contribution is much larger for the older owner targeting the same benefit. This is why defined benefit plans are almost always recommended for owners in their fifties or older, and rarely make sense for someone in their thirties.
• The plan requires an actuary, an annual Form 5500 filing, and materially more administrative cost than a SEP or Solo 401(k), typically $2,000 to $4,000 a year in actuarial and administrative fees. This overhead only makes sense once the extra tax-deferred contribution capacity clearly outweighs it, generally starting somewhere in the six-figure net-income range for an owner in the right age bracket.
• Contributions are mandatory, not discretionary, once the plan is established, unlike a SEP or Solo 401(k) profit-sharing contribution that can be skipped or reduced in a lean year. This is the real tradeoff: a defined benefit plan commits the business to a funding schedule, which is a meaningful cash-flow commitment for a trades business with real revenue volatility. Some owners pair a defined benefit plan with a companion Solo 401(k) (a “combo plan”) specifically to keep some discretionary contribution flexibility alongside the mandatory defined benefit funding.
• A trades business with employees faces the same nondiscrimination testing issues as with a SEP, generally requiring the plan to cover eligible employees in some form, which is part of why defined benefit plans in the trades tend to show up in smaller, owner-only or owner-plus-family operations rather than businesses with a larger W-2 staff.

What about the Roth option?

A Solo 401(k) can include a Roth option for the employee deferral portion (the employer profit-sharing piece is always pre-tax), letting the owner choose pre-tax or after-tax treatment each year. A SEP IRA has no reliably available Roth version; SECURE 2.0 technically allows it starting in 2023, but adoption among SEP providers has been uneven, so an owner wanting Roth flexibility generally finds the Solo 401(k) the more dependable route.

• Roth makes the most sense in a lower-income year or for an owner who expects to be in a higher tax bracket in retirement than today, since Roth contributions are made with after-tax dollars but grow and withdraw tax-free.
• Pre-tax makes the most sense in a high-income year, since it reduces the current year’s taxable income when the marginal rate is highest, which is often exactly the years a trades business is deciding how much to contribute in the first place.

Plan comparison at a glance

Plan	2026 contribution ceiling	Best for	Establishment deadline
SEP IRA	25% of compensation, up to $72,000	Variable income, wants maximum flexibility	Extended filing deadline
Solo 401(k)	$24,500 deferral plus employer share, up to $72,000 ($83,250 at 60-63 with catch-up)	Moderate income, owner 50+	December 31 of the tax year
Defined benefit plan	Actuarially calculated, can exceed $200,000	High, stable income, owner 50s or older	Before the end of the tax year

How do I choose, and how do the deadlines compare?

The right plan depends mostly on income level, age, and how much flexibility you need to skip a contribution in a lean year, with each option’s establishment deadline forcing the decision earlier than tax season for two of the three.

• Lower or variable income, wants maximum flexibility to skip a bad year, and values simplicity over maximum contribution room: SEP IRA, funded as late as the extended filing deadline.
• Wants to maximize contribution room at a moderate income level, and can commit to establishing the plan by December 31: Solo 401(k), especially valuable for an owner 50 or older who benefits from the catch-up contributions.
• High, stable income, owner in their fifties or older, and comfortable with the added administrative cost and mandatory funding commitment: defined benefit plan, often paired with a companion Solo 401(k).
• Deadline comparison: SEP IRA can be established and funded up to the extended filing deadline. Solo 401(k) must be established by December 31 of the tax year (contribution itself can wait until the extended filing deadline). Defined benefit plan generally must be established before the end of the tax year as well, and because it requires an actuarial calculation, waiting until late December to start the process risks running out of time to get it properly set up.

What should I do next?

If you don’t currently have a retirement plan and net income is climbing, don’t default to a SEP IRA just because it’s the plan most banks and brokerages push first; run the Solo 401(k) comparison at your actual income level, since the gap in favor of the 401(k) is largest in the moderate-income range most trades businesses sit in. If you’re over 50 with strong, consistent income and already maxing out a Solo 401(k), the defined benefit conversation is worth having before assuming you’ve hit your contribution ceiling.

• Best entity structure for a trades business, how S-corp compensation affects the retirement contribution calculation
• Estimated taxes for self-employed tradespeople, how a retirement contribution reduces the current year’s estimated tax liability
• Bookkeeping and job costing for a trades business, knowing actual net income early enough to plan a year-end contribution

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.