During tax season, many business owners revisit their retirement savings options, including their Roth IRAs. Sometimes, that can be as simple as a maximum contribution. But for others, they make too much money to directly contribute to a Roth. While the IRS has rules around income limits for Roth contributions, business owners can still contribute to a Roth IRA if they follow a few simple steps. The backdoor Roth strategy can be a great way to contribute money to your Roth. Making sure your situation is right for this is key.
Background
Contributing to a Roth IRA is a great retirement savings vehicle. Adding post-tax dollars to an account that will never be taxed again can significantly improve your future retirement cash flow. However, the IRS has built rules around how much you can contribute to these accounts, in theory, to keep high earners from overfunding their Roth IRAs. In 2025, the contribution limit is $7,000, or $8,000 if you are over 50. While that may not seem like a lot, over the course of multiple years those contributions can begin to add up.
The IRS also currently has an income limit for taxpayers wanting to contribute to a Roth IRA. For 2025, that cap is $165,000 for a single filer and $246,000 for a married couple. As long as your modified adjusted gross income is below that, you can directly contribute to a Roth without issue. For those making more, that’s when the Backdoor Roth strategy enters the picture.
It’s worth noting that there is a phaseout range for contributions as well. For example, in order to contribute the maximum amount, your income must be below $150,000 (single) or $236,000 (married). If you are a single filer and your income is between $150,000 and $160,000, there is a limited amount of allowable contributions, but not the full maximum.
Backdoor Roth
For those whose income falls above the limits, the Backdoor Roth strategy enters the picture. While they cannot directly contribute to a Roth IRA, a few extra steps can reach the same result of more funds in their Roth IRA. For the Backdoor Roth strategy to be done well, there are three major steps to take:
First, open both a Traditional IRA and a Roth IRA. You could do this with your advisor, or at a brokerage firm. It is fine if you already have a funded Roth IRA, which you likely will if you do this strategy over multiple years.
Second, make a non-deductible contribution to your traditional IRA. Non-deductible means that you are not claiming an IRA deduction on your tax return, thereby essentially contributing after-tax money to your traditional IRA.
Third, convert the $7,000 contribution in your traditional IRA to your Roth IRA. This is usually done through a form with your advisor and/or brokerage.
The backdoor Roth IRA can work successfully with these three steps. From a tax reporting perspective, your advisor or brokerage will report your 1099s to the IRS automatically. While helpful, you need to also file Form 8606 along with your annual 1099s to finish the strategy. This form will notify the IRS that your IRA contribution was in fact a non-deductible contribution. Otherwise, you may inadvertently have to pay taxes twice on the same $7,000.
Things to Consider
The backdoor Roth strategy is helpful for certain people, but certainly not everyone. One important assumption to this strategy is that you currently do not have any pre-tax money with a Traditional IRA, Simple IRA, and/or SEP IRA. Those with an old 401k that got rolled into a Traditional IRA could get ruled out from maximizing this strategy. The IRS instituted a Pro-Rata rule for convertible non-deductible money. For example, if you have $70,000 in a traditional IRA and try to contribute a non-deductible $7,000 into a new IRA. Once you go to convert the $7,000 (or any amount), you cannot pick and choose only the non-deductible money between all your IRAs. As a result, since $7,000 of $70,000 is 10%, only 10% of your Roth conversion will be tax-free, and the remaining 90% will be. In general, having any money in a traditional, Simple, and/or SEP IRA can usually be a red flag for the backdoor Roth strategy.
However, there are possible workarounds that can help fix the pro-rata problem. If you have existing money in a Traditional, Simple, or SEP IRA, it could be possible to move those assets and give you access to this strategy. For example, owners who have a 401k plan through the company can roll their IRAs into their 401k, thereby “closing” the IRAs. For owners who have active Simple or SEP plans, it could be worth converting those plans to 401k plans first. This is where the expertise of an advisor and accountant can help make sure any workaround is suitable for you.
Since there are quite a few hoops to jump through, sometimes it may not be worth the work for your backdoor Roth. Especially if you are under the Roth income limits, it is likely much easier to just contribute directly to your Roth IRA. Alternatively, this strategy should be addressed after looking at your retirement account options through the company. In many current 401k plans, it could be the case that the plan already allows you to contribute to a Roth 401k instead of a traditional 401k. If that is the case, it may be worth maxing those accounts out first since the limits are larger ($23,500 in 2025 for someone under 50) and there is no phase-out income limit. After maxing out company plans, then turning to the backdoor Roth strategy could be addressed.
Determine the Right Strategy
The backdoor Roth strategy can be a powerful financial planning tool. Having the ability to build after-tax money regardless of your income can build a firmer retirement foundation. Make sure this strategy is right for your situation. Having a high enough income level without any IRAs can set you up well for this strategy. Work with a professional to make sure you contribute to your IRA correctly, convert the money to the Roth correctly, and make sure everything gets reported properly. Staying organized can be one of the easiest ways to reduce your lifetime tax bill.
TC Falkner 