Many small business owners dismiss Roth IRAs because they believe their income is too high for them to qualify to make Roth contributions. Others assume their current tax rate is higher than it will be in retirement, so they prioritize tax deductions now over tax-free income later.
But overlooking a Roth IRA entirely could mean missing out on valuable tax-saving opportunities.
Rules and restrictions
Roth IRA contributions are not deductible, but they are beneficial because you reap tax savings on the back end. (More on that later.) For 2026, the annual contribution limit is $7,500 (up from $7,000 for 2025). If you will be 50 or older by the end of the tax year, you can make an additional $1,100 catch-up contribution. The same limits apply to traditional IRAs, and your Roth IRA limit is reduced by any traditional IRA contributions you make for the year.
But your ability to make Roth IRA contributions is phased out if your modified adjusted gross income (MAGI) exceeds certain levels. For 2026, the phaseout ranges are:
- $153,000 to $168,000 for single individuals and heads of households, and
- $242,000 to $252,000 for married couples filing jointly.
If your MAGI falls within the range, your contribution limit is reduced. If it equals or exceeds the top of the range, your ability to contribute is eliminated.
Married individuals who file separately and live apart for the full year are treated as single individuals for the income limitations. However, separate filers who live together at any time during the year are subject to a phaseout range of $0 to $10,000.
Is your income too high to qualify?
At first glance, these figures may cause you to assume you are ineligible for Roth contributions. But take another look.
- When calculating MAGI for Roth IRA eligibility purposes, self-employed individuals may be able to significantly reduce their taxable income through deductions for:
- Certain business expenses, such as rent, home office expenses and computer costs,
- Contributions to a tax-deferred retirement plan, such as a solo 401(k), SEP IRA or SIMPLE,
- Health insurance premiums, and
- Self-employment tax.
These deductions, along with others, are subtracted when calculating MAGI. Therefore, a self-employed person can have relatively high gross income from his or her business while having a much lower MAGI.
The choice between contributing to a Roth IRA or a tax-deferred account is not an all-or-nothing proposition. Depending on your situation, you may decide to contribute to both types of accounts, subject to applicable limits. Contributing to a tax-deferred retirement plan provides immediate tax savings. And, because these contributions lower your MAGI, they may put your taxable income below the phaseout limits for Roth IRA contributions.
Additional benefits
The main upside of contributing to a Roth IRA is that qualified withdrawals will not be taxed. This can be advantageous if you expect to be in a higher tax bracket in retirement or if tax rates increase. Moreover, withdrawals from Roth accounts are not counted when calculating the taxable portion of your Social Security benefits.
Another Roth IRA advantage is that you do not have to take withdrawals at any age, meaning the account can continue to grow tax-free. With a traditional IRA (and other tax-deferred retirement accounts), at age 73, you generally must begin to take required minimum distributions or face a penalty equal to 25% of the amount you should have withdrawn but did not. In addition, if your Roth IRA is passed on to your heirs, it can continue to grow tax-free, and their withdrawals generally will be tax-free. However, most nonspouse beneficiaries will be required to deplete the account within 10 years of inheriting it.
Bottom line
A Roth IRA can offer several potential advantages, and self-employed individuals may be more likely to qualify to make Roth IRA contributions than other taxpayers with similar gross incomes. However, they are not right for every situation. We can help review your eligibility and create a long-term retirement strategy that aligns with your personal and financial goals. Contact your Rudler, PSC advisor today to learn more.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Kacie Hamlett, Senior Accountant and Matt Topmiller, CPA.
If you would like to discuss your particular situation, contact Kacie or Matt at 859-331-1717.
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