Fidelity's Backdoor Roth IRA: Get Your Hands on It
James Lawson- Fidelity Investments, one of the nation's leading financial services firms, has quietly rolled out a new IRA option, the Fidelity Backdoor Roth IRA.
- This option offers a simple, low-cost way for investors to gain access to a Roth IRA.
- Fidelity Investments continues to roll out new investment products, including an innovative IRA option called the Backdoor Roth IRA.
Fidelity Investments, one of the nation's leading financial services firms, has quietly rolled out a new IRA option, the Fidelity Backdoor Roth IRA. This option offers a simple, low-cost way for investors to gain access to a Roth IRA.
What Is a Roth IRA?
A Roth IRA is a type of Individual Retirement Account (IRA), which is funded by after-tax dollars. The money in a Roth IRA is not tax-deductible, but it can grow tax-free and, if withdrawn after age 59 1/2, it is exempt from income tax.
The Roth IRA was created in 1998 as the successor to the traditional IRA. Roth IRAs were introduced as a response to the Taxpayer Relief Act of 1997, which changed the rules for traditional IRAs.
How Does a Roth IRA Work?
A Roth IRA, named after its key sponsor, Senator William Roth (R-Del.), is a tax-advantaged, individual retirement account. Introduced in 1997, a Roth IRA provides three benefits to investors:
Tax-free withdrawals: Traditional IRA contributions and earnings are taxed as ordinary income. Roth IRA contributions are not taxed at all, and the earnings are tax-free as long as the account has been open for at least five years.
No required minimum distribution (RMD): Roth IRA owners are not required to take minimum withdrawals from a Roth IRA once the account owner reaches age 70 1⁄2.
No early withdrawal penalty: IRA owners who have earned income can withdraw money early from a Traditional IRA. However, they're subject to penalty taxes of 10% to 20%. Roth IRA owners, on the other hand, can withdraw money at any time without penalty.
When Is a Roth IRA Not a Roth IRA?
Fidelity's backdoor Roth IRA is a Roth account that's treated as if it's a Roth IRA, but is actually a traditional IRA, and is subject to the same contribution limits and rules that apply to traditional IRAs.
The Fidelity backdoor Roth IRA also has a wider range of investment options than a traditional IRA, and offers a number of cash management services, including check-writing and wire-depositing.
How Much Can I Put Into a Roth IRA?
If you are younger than 70 1/2 years old, you can contribute up to $6,000 a year to a Roth IRA in 2020. If you are 50 or older, that number jumps to $7,000.
This Roth IRA backdoor contribution is in addition to your yearly traditional IRA contributions. In 2020, the maximum yearly contribution to a traditional IRA is $6,000, or $7,000 if you are 50 or older.
Where Do I Open a Roth IRA?
While Fidelity offers three Roth IRAs, its Backdoor Roth IRA - which is available only to customers who deposit their qualified funds into certain Fidelity-managed mutual funds - is the most interesting one.
The Backdoor Roth IRA requires that you deposit $5,500 or more into certain Fidelity-managed mutual funds. Then, as with a regular Roth IRA, the money grows tax-free, and withdrawals are tax-free after age 59 1/2. However, unlike the regular Roth IRA, the Backdoor Roth IRA is available only to Fidelity account holders, and you can only make qualified withdrawals when you rollover your Fidelity IRA.
What Are the Best Roth IRA Providers?
In the past, you have had to contribute to an IRA via a trustee-to-trustee transfer. This transfer process required you to wait 60 days from receipt of your IRA funds before you could invest. In 2020, Fidelity added a backdoor Roth IRA option that allows you to invest up to $10,000 of your IRA funds immediately.
How Are Roth IRA Withdrawals Taxed?
The Internal Revenue Service (IRS) allows investors to make a qualified withdrawal from their Roth IRA account at any time, as long as they have reached the age of 59 1/2. However, these withdrawals will incur a 10% federal penalty in addition to regular income taxes.
Roth IRA Withdrawal Rules
You can withdraw your contributions at any time without tax or penalty. However, once you begin making regular withdrawals, you must start taking them from your Roth IRA account (not your traditional IRA).
When you withdraw money, as stipulated under Roth IRA withdrawal rules, you must pay income taxes on the amount you withdraw.
Roth IRA Conversion Rules
A Roth IRA is a retirement account that is funded with after-tax dollars, meaning you don't pay taxes on the investment gains made inside the account. The money is then taxed only when you pull it out in retirement.
Roth IRAs offer certain tax advantages, and high-income individuals get even more incentives. For example, for 2020, single filers with modified adjusted gross income (MAGI) between $122,000 and $137,000 may contribute up to $6,000 to a Roth IRA, while married couples filing jointly can put away up to $12,000. For 2021, the contribution limits are $7,000 and $13,000, respectively.
Additionally, Roth IRAs allow for tax-free withdrawals during retirement. This makes them more attractive than a traditional IRA, which is subject to income taxes when you withdraw the money.
Gold IRA: Should You Open One To Save For Retirement?
The Bottom Line
Fidelity is rolling out its backdoor Roth IRA in private pilot form, but the firm is planning on making it available to everyone by 2020. The demand is so high that Fidelity hasn't even been able to keep up with demand. While you may be lucky enough to be invited to Fidelity's backdoor Roth IRA, don't count on it. Patience is required, but if you're eligible, the Fidelity backdoor Roth IRA is a no-brainer.
