A Step-by-Step Guide to Backdoor Roth IRA Investing

  • A backdoor Roth IRA is a type of traditional IRA that can be opened and funded after you've turned 701⁄2 years old. (A traditional IRA is a tax-favored account that allows you to save for retirement on a tax-deferred basis.) Unlike a traditional IRA, contributions to a backdoor Roth IRA are not tax deductible.
  • However, withdrawals from a backdoor Roth IRA are tax-free once you turn 591⁄2 years old.
  • A backdoor Roth IRA is a type of traditional IRA that can be opened and funded after you've turned 701⁄2 years old. (A traditional IRA is a tax-favored account that allows you to save for retirement on a tax-deferred basis.) Unlike a traditional IRA, contributions to a backdoor Roth IRA are not tax deductible.

A backdoor Roth IRA is a type of traditional IRA that can be opened and funded after you've turned 701⁄2 years old. (A traditional IRA is a tax-favored account that allows you to save for retirement on a tax-deferred basis.)
Unlike a traditional IRA, contributions to a backdoor Roth IRA are not tax deductible. However, withdrawals from a backdoor Roth IRA are tax-free once you turn 591⁄2 years old.



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Advantages of a Backdoor Roth IRA

Because backdoor Roth IRAs are completely self-directed, you direct the investments, and you don't have to pay the 10% penalty for nonqualified distributions from traditional IRAs.
Unlike traditional IRAs, you don't have to pay the 10% penalty on earnings from Roth contributions.

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Backdoor Roth IRAs allow unlimited contributions.

You can withdraw contributions at any time without penalty.

There are no income restrictions on who can contribute to a Roth IRA.

Dividends, interest, and capital gains from investments grow tax-deferred.

There are no required minimum distributions (RMDs) from a Roth IRA, which means you can take your money out at any time.

There are fewer restrictions on the types of investments you can make in a Roth IRA.

There is no required minimum distribution.

The Roth IRA transfers to heirs tax-free.

Disadvantages of a Backdoor Roth IRA
There are contribution limits, which vary by income level.

Unlike traditional IRAs, you can't take penalty-free withdrawals after age 591⁄2.

If funds are withdrawn before age 591⁄2, there is a 10% tax penalty, and the funds are not taxed as ordinary income.

Disadvantages of a Backdoor Roth IRA

While a backdoor Roth IRA is financially savvy, it's not a perfect way for anyone to get into the Roth. If you're married, your spouse can't contribute to a backdoor Roth IRA.
If you have a high-income, you can't contribute to a Roth IRA at all, even with a backdoor strategy.
A backdoor Roth IRA doesn't allow you to control your investments, as you can with a traditional IRA.
You can't do year-to-year conversions.



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backdoor roth fidelity step-by-step

Step 1: Make Traditional IRA Contributions

If you have not made a traditional IRA contribution for 2018, you can still do so. You can contribute up to $5,500 (more for those over 50) for 2018.
To maximize your tax savings, contribute as much as you can, and at least up to the $5,500 limit. Anything over that amount, up to $6,500, can be contributed this year, and $1,000 more next year.

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Step 2: Convert Traditional IRA to Roth IRA
After you submit your 2018 taxes, your IRA contribution will be added to your taxable income for the year. If your income is below the Roth IRA income limits ($120,000-$135,000 for singles and $189,000-$199,000 for couples), you can contribute that amount to your Roth IRA.
However, if your income exceeds the Roth IRA income limits, you must pay a tax penalty on the amount that exceeds the income limit. The tax penalty is equal to 6% of the amount excess over the Roth IRA limit.

Step 3: Rollover Traditional IRA to Roth IRA
Once you have converted your traditional IRA to a Roth IRA, you can roll the money into your current Roth IRA.
Instead of rolling the entire balance over, you can divide the balance into two parts, rolling half over and the other half over next year.

Step 2: Convert Your Traditional IRA into a Roth IRA

Since you have already reached age 701⁄2, you are not eligible to contribute to a Traditional IRA, but you can convert a Traditional IRA into a Roth IRA. You can convert your Traditional IRA into a Roth IRA and avoid paying a 10% penalty as long as you do it within 30 days of your 701⁄2 birthday.
If you convert all or part of your Traditional IRA into a Roth IRA, you will have to pay taxes on the amount converted. You will pay income taxes on the converted amount at your regular income tax rate in the year you convert.
You can contribute up to $6,000 to a Roth IRA in 2021. If you are married, you and your spouse can contribute $12,000 to a Roth IRA in 2021.
Step 3: Open a New Roth IRA Account
After converting your Traditional IRA into a Roth IRA, open a new account at a quality broker.

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Step 3: Contribute to Roth IRA

For 2020, you can contribute up to the greater of:
$6,000
$7,000 if you're age 50 or older
$4,000 if you're age 50 or older and own a traditional IRA
$5,500 if you're age 50 or older and own a traditional IRA

Step 4: Rollover to Roth IRA
Once you've contributed to the Roth IRA, the next step is to roll your existing 401(k) or traditional IRA over to the Roth IRA. Your original contribution is made before taxes and grows tax-free inside the account.



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Step 4: Pay Taxes

If you converted a traditional IRA to a Roth IRA, you must pay tax on any earnings in your traditional IRA. The tax will be based on the amount converted, and you will pay that tax at your ordinary income-tax rate.