Backdoor Roth IRA for Small Business Owners: A Smart Strategy (and How to Do It at Firstrade)

As a small business owner, your income can be “lumpy”—some years are good, some are great. A strong year can limit your ability to contribute directly to a Roth IRA, which can feel frustrating when you’re trying to save more for the future.

The Backdoor Roth in 30 Seconds
A backdoor Roth isn’t a special account—it’s a two-step method:

• Step 1: Make a nondeductible contribution to a Traditional IRA.

• Step 2: Convert those dollars to a Roth IRA.

This approach can be useful because Roth conversions are generally permitted regardless of income, even when direct Roth contributions are limited by income.

Business Owner Watch-Out: The Pro-Rata Rule
If you have Traditional IRA money elsewhere—including SEP or SIMPLE IRAs—those balances can make part of a conversion taxable under the IRS pro-rata rules. In plain English: even if your new contribution is after-tax, your conversion may be partially taxable if you have pre-tax IRA money elsewhere. The IRS looks at your total IRA balances for the year when determining the taxable portion of a conversion.

Mind Your Tax Bracket
A Roth conversion can increase taxable income for the year. For business owners, timing matters because income can swing based on profit, deductions, and year-end planning. Converting “just enough” to fit your overall tax plan is a common approach—but it’s worth modeling with a tax professional.

Plan Ahead: The 5-Year Rules
Roth IRAs have multiple “5-year rules.” Depending on your age and what you withdraw (contributions vs. converted amounts vs. earnings), taking money out too soon can trigger taxes and/or a 10% early distribution penalty. If there’s a chance you’ll need these funds in the next five years—especially if you’re under 59½—get advice before converting.

Ready to Do a Backdoor Roth at Firstrade?
Are you ready to move ahead and start maximizing your retirement savings? Follow this link to get started!

What is the process of Backdoor Roth Conversion at Firstrade?

• You need two IRA accounts: a Traditional IRA and a Roth IRA (both available at Firstrade). Don’t have an IRA account at Firstrade yet? Click here to open IRA accounts.

• Deposit funds into your Traditional IRA account.

• Complete Firstrade’s Roth IRA Conversion Form and upload it online or send it to Firstrade.

• Firstrade will process your request, and you’ll be set.

Final reminder: Backdoor Roth contributions are more complicated than a standard Roth contribution. If you have multiple IRAs or you’re uncertain about pro-rata taxation and the tax impact of a conversion, it’s wise to work with a qualified tax professional to avoid costly errors.

Important disclosure: This article is for general educational purposes only and isn't tax or legal advice. Small business retirement accounts can change the tax results of a Roth conversion. Consider consulting a qualified tax professional before acting.