- A backdoor Roth IRA is an IRA account with pre-tax or tax-deductible contributions that are intended for future withdrawal.
- If withdrawal occurs before age 59.5, however, a 10% penalty is imposed on all earnings.
- A traditional IRA is also an IRA account, but it has post-tax contributions and no income tax deduction.
A backdoor Roth IRA is an IRA account with pre-tax or tax-deductible contributions that are intended for future withdrawal. If withdrawal occurs before age 59.5, however, a 10% penalty is imposed on all earnings.
A traditional IRA is also an IRA account, but it has post-tax contributions and no income tax deduction. Therefore, a traditional IRA allows for earnings on withdrawal but is subject to a 10% penalty if withdrawn before age 59.5.
Steps in Backdooring Your Roth IRA
1. Open a Fidelity Roth IRA.
You’ll need to open a Roth IRA with $0.00 in order for this to work. You may do this at Fidelity’s website or in person with a qualifying investment, such as an IRA equity, money market, or bond fund.
2. Deposit $0.00 in an IRA equity or money market fund.
Next, you’ll need to deposit $0.00 in an IRA equity or money market fund. Be sure the fund has zero net assets. This is an easy process, as funds are automatically created upon request. However, it may take a few days for the funds to appear in your IRA account.
3. Withdraw $0.00 from the fund.
The next step is to withdraw $0.00 from the fund. This step is somewhat tricky, and it may take a few tries to get the exact amount. At first, withdraw $0.00 and deposit the money into your checking account.
4. Withdraw $0.00 from the checking account.
Next, withdraw $0.00 from the checking account, and then deposit $0.00 back in to that account.
5. Withdraw $0.00 from the checking account and deposit $0.00 back in.
Finally, withdraw $0.00 from the checking account and then deposit $0.00 back in.
That’s it! You’re done.
Roth IRA Conversions
While most of us have retirement accounts, such as 401(k)s, which accumulate tax deferred dollars, we can also have Roth IRAs, which allow you to invest after-tax dollars. Roth IRAs are flexible in that you can make contributions anytime as long as you have earned income. When you make the contributions, you don’t have to pay taxes on the money you contribute.
You can’t withdraw the contributions you make to a Roth IRA without penalty, but you do get a tax break when you retire.
Conversion to Roth IRAs
Converting a Traditional IRA to a Roth IRA can result in a tax bill, but there are a few ways to minimize your tax liability.
Roth 401(k) Conversions
Before you can convert your traditional IRA to a Roth IRA, you must first roll it over to a Roth 401(k). From the Roth 401(k), you can roll it over to a Roth IRA.
Rollovers from a Traditional IRA to a Roth 401(k) require that you complete two 60-day rollovers.
For Roth 401(k) accounts, you can roll over money from a traditional IRA, another Roth 401(k) account, or a solo 401(k). You cannot roll over money from a SIMPLE IRA or a SEP IRA.
Traditional IRA Rollovers
The easiest way to free up funds to contribute to a Roth IRA is by doing a rollover. If you have money in a traditional IRA and would like to do a rollover into a Roth IRA, there are a number of steps you’ll need to follow.
Converting Roths Back to Roths
For investors who are 59.5 or older, it is possible to convert a Roth back to a traditional. Keep in mind that this conversion will count as an early distribution, so you will have to pay income tax on the amount you converted.
Using Your Backdoor Roth IRA
Step 1: Open a Fidelity Roth IRA Account
Step 2: Transfer Your Traditional IRA to Fidelity
Step 3: Rollover Your Traditional IRA Into Your Fidelity Roth IRA
Step 4: Move the Traditional IRA Funds to a Brokerage Account
Step 5: Open a Brokerage Account and Transfer Traditional IRA Funds There
Step 6: Fund the Brokerage Account With Your Traditional IRA Funds
Step 7: Rollover Your Traditional IRA Funds from Brokerage to Roth IRA
Step 8: Move the Traditional IRA Funds Into the Brokerage Account
Step 9: Close the Brokerage Account
Step 10: Close the Fidelity Roth IRA Account
Gold IRA: Should You Open One To Save For Retirement?
The Bottom Line
Fidelity Roth IRAs are a great option for investors seeking to spread their investment risk across multiple asset classes. The only drawback is that there is no commission-free ETF option, requiring investors to pay high commission rates to buy and sell ETFs.