Backdoor Roth for LLC Owners: The Step-by-Step

Why the backdoor exists

Direct Roth IRA contributions phase out at $150k–$165k single / $236k–$246k married filing jointly (2025). Above those lines, direct contribution is disallowed.

But the IRS has no income limit on Roth conversions. So the workaround:

1. Contribute to a Traditional IRA (no income limit on non-deductible contributions)
2. Immediately convert that Traditional IRA to Roth (no income limit on conversions)
3. Result: money sitting in Roth that you couldn't have put there directly

Step-by-step

Step 1: Open a Traditional IRA (if you don't have one)

At your brokerage. 5-minute form. No funding required yet.

Step 2: Contribute $7,000 ($8,000 if 50+) to the Traditional IRA

For 2025, $7,000 is the annual limit. Contribute cash from a taxable account. Don't make this a deductible contribution — we want it non-deductible on purpose.

Step 3: File Form 8606 with your taxes

This reports the non-deductible contribution. Without Form 8606, the IRS won't know the $7,000 was already post-tax — and you'll get taxed on it again when you withdraw from Roth.

Step 4: Convert to Roth

Call or chat with your broker. Ask to convert the full Traditional IRA balance to Roth. Most brokers have a one-click "Roth conversion" button. Typically happens within 1–2 business days.

Step 5: Report the conversion on Form 8606 next year

Same Form 8606 — you use it to report both non-deductible contributions AND Roth conversions. If done correctly, the conversion generates $0 in taxable income (because you already paid tax on the $7,000).

The pro-rata trap

How to work around the pro-rata trap

You need to get pre-tax IRA money out of "any Traditional IRA" for the conversion year. Two main options:

Option 1: Roll pre-tax IRA into a Solo 401k

Solo 401k balances don't count against the pro-rata rule. If you move your SEP-IRA balance into a Solo 401k before December 31, the pro-rata denominator becomes zero — backdoor works cleanly.

This is the main reason high-income self-employed people prefer Solo 401k over SEP-IRA: it preserves the backdoor.

Option 2: Convert everything

You can convert the entire Traditional IRA / SEP-IRA balance to Roth. But you pay ordinary income tax on all of it in that year. For a $50k balance at a 32% bracket, that's $16k in tax — a big bill.

Worth it if you have a low-income year or if you believe future taxes will be much higher.

Timing tips

• Don't wait. Contribute and convert the same week. The longer the money sits in Traditional, the more earnings accumulate — and those earnings ARE taxable on conversion.
• Keep the Traditional IRA balance at $0 at year-end. Convert the contribution fully. Don't leave odd change behind.
• Married? Do one each. Both spouses with earned income can each do $7,000 per year. $14,000 combined.
• Year-end deadline matters. The contribution deadline is the following tax filing date (April 15). But for the pro-rata rule, the IRA balances as of December 31 of the conversion year are what count. Plan accordingly.

Common mistakes

• Forgetting Form 8606. Results in double taxation later.
• Ignoring the SEP-IRA balance. Pro-rata bites.
• Deducting the Traditional IRA contribution. Destroys the backdoor — you'd be converting pre-tax money.
• Funding January 1 and converting December 31. Lots of time for earnings to accumulate that then get taxed.

Mega backdoor (bonus)

If your Solo 401k plan allows after-tax contributions AND in-plan Roth conversions, you can do the "mega backdoor": contribute up to $70,000/year (minus your regular contributions) as after-tax, then convert to Roth.

Most prototype Solo 401k plans (Fidelity, Schwab, E*TRADE) don't support this. You need a customized plan (My Solo 401k Financial, Rocket Dollar). Not worth the effort unless you're contributing $50k+ annually.

Is the backdoor still legal?

Yes, as of 2026. There's been Congressional chatter about closing it since 2021's Build Back Better proposal, but nothing has passed. IRS officially acknowledged the technique in Notice 2014-54. Safe to use.