I have a contractor friend who's 58 and has been running his own business for 25 years. He has no retirement savings. He was always going to do it "next year" or "when business gets better." He's now planning on working until he physically can't. That's a plan, technically. It's not a good one.
The good news for self-employed contractors is you have access to retirement accounts with contribution limits that dwarf what most employees can put away. The bad news is you have to actually set them up and use them.
SEP-IRA: The Simple One
A Simplified Employee Pension IRA lets you contribute up to 25% of your net self-employment income, with a maximum of $69,000 in 2024. It's easy to set up (most brokerages have a one-page form), contributions are tax-deductible, and you can contribute as late as your tax filing deadline including extensions.
The downside: you can't contribute more than 25% of net income regardless of what you want to put in. And if you have employees, you generally have to contribute the same percentage for them as you do for yourself. For a solo operator or a business without many employees, it's an excellent option.
Solo 401(k): The More Powerful One
A Solo 401(k), also called an Individual 401(k), is for business owners with no employees other than a spouse. It allows you to contribute as both an employee (up to $23,000 in 2024, or $30,500 if you're 50+) and as an employer (up to 25% of compensation). Combined limit: $69,000.
The advantage over a SEP-IRA is that the employee contribution portion is dollar-for-dollar, not percentage-based. A solo contractor making $80,000 net can contribute much more as a percentage of income with a Solo 401(k) than a SEP-IRA. The setup is slightly more involved but still manageable through most major brokerages.
When to Start
Today is better than tomorrow for obvious reasons. Compound growth is not patient. A 40-year-old who puts $20,000 per year into a Solo 401(k) for 25 years, growing at a conservative 7% average return, retires with roughly $1.3 million. A 50-year-old doing the same has ten fewer years and roughly half that amount. The difference isn't motivation. It's time.
If you haven't started a retirement account, this week is a reasonable deadline to set for yourself. Call your accountant or a fee-only financial advisor. The conversation takes an hour. The account can be open before end of week.
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Written by
Dina Good
Founder, WerkOps
Dina grew up in the trades. Her father was a contractor, then a building inspector, and the job site was her classroom long before any formal one was. She went on to own her own contracting company, which is where she first felt the pain of running a skilled trade business on bad software and worse spreadsheets. A love of data pulled her into programming, and the two worlds eventually collided into WerkOps - software built by someone who has actually been on the truck.