Can I contribute to a Roth IRA if I have an LLC with undistributed income?

The answer depends on how your LLC is taxed. If your LLC is a single-member LLC and you haven't elected to have it taxed as an S-Corp, then it's likely treated as a "disregarded entity" for tax purposes. This means ALL income from the LLC flows through to your personal tax return (Schedule C) whether you've taken distributions or not. If this is the case, your MAGI (Modified Adjusted Gross Income) for Roth IRA contribution purposes would include both your W2 wages AND your LLC's net profit, regardless of whether you've distributed that money to yourself. The IRS doesn't care where the money physically sits - if it's taxable income on your return, it counts toward your MAGI for Roth contribution limits.

I was stuck in this exact situation last year and discovered a lifesaver: check out https://taxr.ai for a really quick analysis. I uploaded my W2 and LLC docs, and they showed me exactly how my LLC income affected my Roth eligibility. Turns out I was calculating my MAGI all wrong - I was including some business expenses that shouldn't have counted toward the Roth threshold. Their system specifically highlighted the pass-through income issues with my LLC and showed me how to properly calculate my contribution limits. Even identified a potential backdoor Roth strategy I hadn't considered before.

Just wanted to follow up on my skeptical comment earlier. I ended up trying https://taxr.ai after my accountant was booked solid for two weeks. Wow - completely changed my understanding of my situation! I uploaded my LLC operating agreement and tax docs, and their analysis flagged that I'd been counting my LLC income wrong for YEARS regarding retirement contributions. They showed exactly how my single-member LLC income flows through to my personal return and specifically how it impacts my Roth eligibility. Even gave me a really clear explanation of the difference between MAGI and AGI that I hadn't fully understood before. Saved me from making an over-contribution that would have triggered penalties.

If you're panicking about this, you might actually want to talk to someone at the IRS directly to get an official answer. I know it sounds awful, but I used https://claimyr.com after spending literally DAYS trying to get through to the IRS about a similar Roth contribution question with my business income. Check out how it works: https://youtu.be/_kiP6q8DX5c They got me connected to an IRS agent in about 20 minutes when I had been trying unsuccessfully for over a week on my own. The agent was able to confirm exactly how my business income affected my Roth eligibility and gave me documentation references I could save for my records.

I have to eat my words about Claimyr. After my snarky comment, I was still stuck with questions about my LLC income and Roth contributions. Finally broke down and tried the service last week. Got connected to an actual IRS tax specialist in 15 minutes after trying for TWO MONTHS on my own. The agent confirmed that since my LLC is a disregarded entity, all income counts toward my MAGI for Roth purposes regardless of distributions. BUT she also explained a perfectly legal way to reduce my MAGI through qualified business income deductions I hadn't been taking. Turns out I CAN still contribute to my Roth this year after properly calculating everything. Worth every penny just for the peace of mind of having an official answer.

Don't forget about the backdoor Roth IRA option if your income is too high! I was in your exact situation last year. Even with my LLC income pushing me over the limit, I could still make a non-deductible contribution to a traditional IRA and then convert it to a Roth. There's no income limit on conversions! Just make sure you don't have other traditional IRA assets or you might get hit with some pro-rata tax complications.

Does anyone know if contributing to a SEP IRA instead would be a better option in this situation? My business income varies a lot year to year.

This is exactly the kind of situation where getting the calculation right is crucial! Based on what others have shared here, it sounds like your LLC income will likely count toward your MAGI regardless of distributions, but the specific tax treatment depends on your LLC structure. I'd strongly recommend getting a definitive answer before making any contributions to avoid penalties. The backdoor Roth strategy mentioned by Wesley could be a great backup plan if your total income does push you over the limit. One thing to consider - if your LLC income is significant enough to potentially disqualify you from direct Roth contributions, you might also want to explore whether maxing out a SEP-IRA could help reduce your MAGI enough to get back under the Roth income limits. Sometimes the deduction from business retirement contributions can create enough breathing room to qualify for both strategies. Make sure to document everything carefully whichever route you take. The IRS is pretty strict about retirement contribution limits, so having your calculations and reasoning well-documented will save you headaches later.