Retirement Accounts for Contractors: Solo 401(k), SEP-IRA, and Cash Balance Plans

A contractor can shelter up to $72,000 a year in a Solo 401(k) — $80,000 if 50 or older — through a combination of $24,500 in employee deferral plus employer profit-sharing of up to 25% of W-2 salary. Most contractors are significantly under-utilizing this and other retirement accounts; the combination of available contribution limits and the tax savings at typical contractor income levels makes this the highest-value annual planning decision most contractors have.

Why Do Retirement Accounts Matter More for Contractors?

Contractors have no employer 401(k) match. They’re building their retirement entirely from their own contributions. But they have access to contribution limits that far exceed what an employee can put into a corporate 401(k) — which means the tax-deferred compounding advantage is available if they use it.

At a 24% marginal federal rate, $50,000 in retirement contributions saves $12,000 in federal income tax in the year of contribution. At 32%, that’s $16,000. That’s money that either goes to the IRS or to your future self.

What Are the Three Main Retirement Account Vehicles for Contractors?

Solo 401(k) — Best for Most Contractors

The Solo 401(k) is designed for self-employed individuals with no full-time employees other than a spouse.

Contribution limits (2026):

• Employee deferral: $24,500 (or $32,500 if age 50+; $35,750 if age 60–63)
• Employer profit-sharing contribution: up to 25% of W-2 salary (S-corp) or 20% of net self-employment income (sole prop)
• Combined limit: $72,000 ($80,000 if 50+; $83,250 if 60–63)

S-corp contribution example at a $100,000 salary:

• Employee deferral: $24,500
• Employer contribution (25% × $100,000): $25,000
• Total contribution: $49,500

Sole prop contribution example at $150,000 net SE income:

• Employee deferral: $24,500
• Employer contribution (20% × net SE income after SE deduction): ~$26,000
• Total contribution: ~$50,500

Advantages over SEP-IRA: The employee deferral component is the critical difference. A sole prop with $100,000 in net income can contribute $24,500 as employee deferral regardless of income — the SEP-IRA on the same income caps out around $18,500. For most contractors, the Solo 401(k) wins.

Deadline: Plan must be established by December 31. Employee deferral election must be made by December 31. Employer profit-sharing contribution can be funded up to the tax return due date (October 15 with extension).

SEP-IRA — Simpler, More Flexible

The SEP-IRA is administratively simpler — no adoption agreement, no annual Form 5500 filing requirement, can be opened at any brokerage in 10 minutes.

Contribution limits (2026): 25% of W-2 salary (S-corp) or approximately 20% of net self-employment income (sole prop), up to $72,000.

The key limitation: No employee deferral component. At lower income levels, this makes the SEP significantly less powerful than a Solo 401(k).

When SEP makes sense:

• You have part-time employees (Solo 401(k) requires covering eligible employees, which eliminates most contractors who have even occasional W-2 help)
• You missed the December 31 Solo 401(k) establishment deadline — SEP can be established as late as the return due date
• Administrative simplicity is worth more than the additional contribution capacity

Deadline: Can be established and funded as late as your tax return due date including extensions (October 15).

Cash Balance Plan — For High Earners 45+

A cash balance plan is a type of defined benefit plan that allows significantly higher contributions than a Solo 401(k) — potentially $100,000–$300,000/year depending on age and income.

Actuarially determined: An enrolled actuary calculates your required contribution based on your age, income, and target retirement benefit. Older contractors can contribute more because there are fewer years to accumulate the benefit.

Approximate annual contribution by age (assuming ~$250,000 in net income):

• Age 45: ~$80,000–$120,000
• Age 50: ~$130,000–$180,000
• Age 55: ~$180,000–$250,000+

Combined with a Solo 401(k): Most contractors who use a cash balance plan also maintain a Solo 401(k) for the employee deferral component. Total combined contribution at age 55 can exceed $320,000/year.

Commitment required: Cash balance plans require contributions every year for the life of the plan. Missing a required contribution has consequences. This is appropriate for contractors with stable, high income — not for contractors with volatile revenue.

Setup cost: $1,500–$3,000 to establish. Annual actuarial fees: $1,500–$2,500.

How Do Contribution Limits Compare Across SEP-IRA, Solo 401(k), and Cash Balance Plans?

Should You Choose Roth or Traditional Contributions?

All three vehicles above are traditional (pre-tax). Roth Solo 401(k) is available — contributions are after-tax, growth and withdrawals are tax-free.

When Roth makes sense for contractors: if you expect to be in a higher tax bracket in retirement than today, or if you believe tax rates will be significantly higher in the future. For most contractors at peak earning years (37%+ marginal rate), the traditional pre-tax contribution is almost always the right choice.

Contractor S-corp salary — your salary level controls your employer contribution ceiling.

Contractor year-end tax planning — when to establish plans and fund contributions.

This article is educational. Consult a licensed CPA for advice specific to your situation.