As your agency grows, most tax planning focuses on reducing your bill today. But there is one strategy that builds long-term, tax-free wealth and stays valuable even as your income rises.
The backdoor Roth IRA.
It is one of the strongest wealth building tools for agency owners who earn too much to contribute to a Roth directly. And it pairs perfectly with a 401k for even more savings. Here is how to use it the right way.
Why the backdoor Roth matters
A Roth IRA grows tax free. Withdrawals in retirement are tax free. There are no required minimum distributions. For high-earning agency owners, adding even a modest amount to a Roth each year compounds into meaningful long-term wealth. The problem is income limits prevent most owners from contributing directly.
The solution is the backdoor Roth.
How the backdoor Roth works
It is a simple two-step process:
- Make a nondeductible contribution to a traditional IRA
- Convert it to a Roth IRA
Because you did not take a deduction, the conversion is tax free or nearly tax free.
The one rule that trips people up
The clean backdoor Roth only works if you do not have other pre-tax balances sitting in any IRA (traditional, SEP, or rollover). The IRS uses a formula called the pro-rata rule, which mixes all IRA balances together and makes part of your conversion taxable.
How agency owners fix this
You can roll your pre tax IRA money into your 401k or Safe Harbor 401k (as long as the plan allows inbound rollovers). This clears out your IRA balance and lets you do clean backdoor Roth conversions every year.
You can do a 401k, an IRA, and a backdoor Roth in the same year
Many agency owners think they must choose between these buckets. But you can actually use all three together:
1. Max out your 401k
You get a large tax deduction through employee and employer contributions.
2. Make a nondeductible IRA contribution
This is allowed even if you max your 401k.
You simply do not take a deduction.
3. Convert it to a Roth IRA immediately
The nondeductible contribution becomes tax free growth once inside the Roth. This adds a second layer of savings on top of your 401k deduction.
This move gives you both. Pre tax savings, tax free savings, and the flexibility to repeat the strategy every year. Employees at regular companies rarely get this much control, but agency owners do.
Contribution limits
The IRA limit rises to seventy five hundred in 2026 if you are fifty or older. While it may seem small, consistent, tax free compounding turns this into real money over time.
When a backdoor Roth is a good fit
• Your income is too high for a direct Roth
• You want tax-free growth
• You already max out your 401k or want an extra savings bucket
• You want flexibility later in life (no required distributions)
• You expect higher taxes in the future
When it may not be right
• Cash flow is tight and you need liquidity for growth.
• You have large IRA balances and cannot move them into a 401k.
• You expect to pull the money soon. Roths are best for long horizons.
Final thoughts
The backdoor Roth is one of the cleanest, highest-leverage strategies for agency owners.
It pairs perfectly with a 401k, gives you access to tax free growth, and helps balance your long term tax picture.
