🌟 2024 UPDATE: The Roth Contribution limit is $7,000 ($8,000 for those 50 years and older) It has also come to my attention that switching your core position to FDIC from SPAXX is not necessary when doing this backdoor Roth IRA strategy. However, some of you (like myself) were not able to do the final Roth conversion step and have found that switching the core position of the funds in the Traditional IRA from SPAXX to FDIC solved the issue. I don't know why this solution worked, but in any case, I presented it in this video to help any one else who encountered the same problem as me. In any case, happy retirement planning and let's make it a great 2024!
Does one have to wait between Cash Management/brokerage account to traditional and traditional to roth transfers? I talked to fidelity and they said you can do it immediately within seconds. Any implications of doing immediately?
@@sohilshrestha9506 I personally wait for funds to clear before doing a Roth conversion. I don't think there are any implications to doing it immediately, but it just gives me more peace of mind knowing that there's a record of my funds cleared in my Traditional IRA before it gets Roth converted. As for CMA/bank to Traditional IRA, I transfer it as soon as I'm ready.
Hey, thanks for the great video. If you do not have the money saved up at the start of the year, can you do this on a monthly basis as you get paid? Transfer the monthly breakdown of the new $7k limit ($583) into the traditional, and then immediately roll over every month, in order to put that money to work in the Roth IRA? Also can you still withdraw any contributions you make (not gains) to the roth IRA if you do it this way?
@@Ryanduncan27 Thanks! Yes, you can certainly do so. I would only say that Fidelity accrues interest at the end of the month so in order to keep the Trad IRA at $0 by Dec 31st, would recommend front loading contributions towards the end of the year so you can Roth convert any interest accrued before December. As for contributions, I'm not entirely sure. I would ask a financial professional to make sure if this is ok.
I made this video in 2022 and a lot of people found it helpful, so I wanted to remake it even better 1 year later! Hope you enjoy and if you have any questions, leave a comment down below! 👇
Excellent video however, I am also a Fidelity user and I saw a flaw. Do you have a fidelity cash management account which means when you deposit money into it it goes into a bank like interest-bearing account whereas I have the exact product except for mine is the brokerage account so when I deposit money it goes into the sweep account, which is SPAXX which earns a lot more interest Other than that, this was hands-down, one of the best videos on the subject. I can’t wait for your new update come out.
@@missouri6014 Thanks! Yeah, using SPAXX is actually going to earn you more interest for sure, but really the CMA is meant only to be a temporary holding account for the funds until they get ultimately get transferred to the Trad IRA, then Roth IRA, and then gets invested immediately. So you're definitely right about that, but since the money is in there for such a short time, I thought it was ok. Appreciate the feedback and glad you found the video to be helpful!
@john-d1775 No prob! There is no maximum limit to a Roth conversion, but (as far as I know) you can only Roth convert up to the annual contribution limit without triggering a taxable event. If you Roth convert a larger amount, the remainder will be taxed as ordinary income.
This is exactly what I was looking for. The amount of detail you provided was perfect. I was thinking how to I change my core position and then you showed how! Fantastic content.
Thanks Donovan! I'm glad you found the content helpful, and I know that it can be somewhat confusing to change your core position so I'm happy that this was helpful as well!
This was the easiest way anyone has explained this process that I’ve seen. Thank you. I was nervous about this process but now it doesn’t seem so scary
Same! This made the process so understandable! Thank you!!! Do you know if if in a back door IRA conversion if each conversion/contribution has to be in there for 5 years before tax free?
@@la54578 No problem! I'm not entirely sure about the 5-year rule. I'm pretty sure it applies to this as well because you're doing a Roth conversion of your contribution so it technically counts as a conversion. But if you wanted a true answer, I would speak to a financial professional.
bro is sitting there talking about making too much money in income each year to directly contribute to a roth ira while wearing a figs jacket on what a GOAT! thanks for explaining it so clearly man keep up the good work
Great video! I made the mistake of contributing directly to the traditional IRA and then I had to wait to move it to the Roth IRA and the cash accumulated $4 of interest which then showed up on a tax form and I had to report it as income which seemed stupid 🤦♂️. Next year I'll definitely make sure to contribute to my CMA first and let it settle before transferring.
Yeah, it’s super annoying when it does that. They key is to do the Roth conversion the moment the funds hit your Traditional IRA. I do this the same day and still got $.60 of interest at the time, but the IRS rounds down so it shows up on my Form 8606 as negligible hah!
@@TheCreditFrog Thank you! There is $.85 of interest in my traditional IRA account left over after my conversion. Would it be an issue if I just transferred that .85 to my CMA or other bank account? Or is it mandatory that the $.85 be converted also? Thanks again. I'm a subscriber!
@aau_626 Yeah, I wouldn’t withdraw any interest from your Traditional IRA if you could help it. Usually not a great idea. I’m not a financial professional, so I’m not super familiar with the specific consequences, but I would just Roth convert those funds to keep it simple. Thanks, I really appreciate the support!
This was a super helpful video. I've always been curious as to how to actually perform one of these. Since I am still eligible to contribute to a Roth IRA without needing to use the backdoor method, I'm set for now, but this will be super good to look back on in the future. Now I just gotta get my income up!
Glad you found the video helpful Spencer! Yes, it's a retirement strategy that is pretty simple to understand and can be very helpful to get some more money into that Roth once you're over the income limit! You'll be over this limit sooner than you think, and when that time comes, you'll know exactly how to handle this situation 👍. Also Green looks great on you 🤩!
Thanks Eric! Yeah, I hope that this video will help anyone that is trying to perform a backdoor Roth with Fidelity. It was super confusing the first time I tried to do it so hopefully others can learn from this video!
Thank you for this video. I've been feeling quite intimidated about this process. I've read a lot of blogs about this process and they make it seem super complicated. Thank you for this video because you showed that it's all very simple and straightforward. Definitely calmed my nerves for sure. Thank you!
This is an awesome video here Stan! And even though I'm not currently in the high-income bracket, it'll surely be super helpful for all those high-income earners that make more than $138K and still want to contribute to a Roth.
Thanks Matt! I know you will get there soon! Although since you’re getting married this year, the numbers may change in your favor. If anything, this video will be here when you need it!
What a great video, Stan! Thank you so much. Quick question: I have both a SEP and traditional IRA. From my understanding, the SEP limit is based on your self-employed income, however I keep reading that the limit for all IRA contributions is $6,500 for 2023. Can you explain that better or if there is something I may be missing? Additionally to avoid pro rata, I would still need to make sure that both the SEP and traditional IRA balances are zero by the end of the year that I completed the conversion to Roth correct?
Hi Selby! Of course, glad you enjoyed the video. The SEP limit ($61k in 2022) is separate from the Roth IRA limit. And yes, to avoid pro rata, both Traditional IRA and SEP IRA must be zero by 12/31!
Thanks for the video, Stan. I successfully did my first backdoor Roth IRA for 2023 using your video last year. The only difference I got from your video was that while waiting a few days for the $6,500 funds to clear in my traditional IRA before transferring them to a Roth IRA, I earned around 6 dollars in interest. Now that I want to contribute to the Backdoor Roth IRA for 2024 ($7000), I am unsure about what to do with the remaining 6 dollars in my traditional IRA.
That's awesome! Yeah, the backdoor Roth is just something you do every year, but once you do it once, it gets pretty routine! As for the $6 in interest, you can definitely Roth convert those funds with no problem. You'll have to pay ordinary income tax on that $6, but that shouldn't be too bad. In the future, you can Roth convert the entire amount + interest in the same year so that your Trad IRA has $0 on Dec 31st. That will make filling out Form 8606 much simpler when you file your taxes!
Quick question - so once you transfer all the funds to the Roth account, you just the traditional Ira open with $0 bal until the following year when you go through this whole process again? I just want to confirm. This video is very helpful. Thank you.
Immediate new subscriber just from this one video, thank you so much for being so thorough and guiding us through step-by-step style by showing us, instead of just talking about it.
Thanks for making this video. This is really helping out. When I called Fidelity, they said doing a backdoor Roth IRA would be easy. But after watching your RUclips video and reading most of the comments with people's questions, I found out about my mistakes. I had a rollover IRA from previous jobs and tried to do a backdoor IRA while leaving the rollover IRA. But as the comments said, I should transfer the money. So I transferred the rollover IRA to my 403(b) to avoid tax. I wouldn't have thought about this until I read most of the comments with your answers. That really helped me a lot. Anyway, thanks so much for making this video. I have a question about the time frame for a backdoor IRA. You said that it takes a few days to be eligible to transfer from a traditional IRA to a Roth IRA, but after a week, it still didn't work. So I called Fidelity, and they said I have to wait for 16 days after the money settles in my traditional IRA. Is it true that it takes so long, like three weeks, to transfer money from a traditional IRA to a Roth IRA? That means I might have some interest during that time, right?
Thanks! Yeah it depends on the bank how long it will take to clear. You will certainly accrue interest during this time, but you can Roth convert that amount too and just pay ordinary income tax on that interest.
thanks for the video!, just as an FYI, you don't need to convert to your Core position on Traditional IRA from SPAXX to FDIC-Insured Deposit Sweep Program, it is possible Traditional IRA with core in SPAXX direct to ROTH IRA
You're welcome Gabriel! Glad you found the video helpful! Thanks for the tip. Yeah, it seems like converting to FDIC isn't necessary, but for some reason SPAXX wasn't working for me. I'm glad it worked for you, and a lot of others have mentioned the same!
Great video.Easy to follow step-by-step process! I have a question. I have an existing traditional IRA in which all contributions in the past years have been using non-deductible contributions. However it is a managed account. So for doing the backdoor ROTH contributions, should I open a new traditional IRA, which is not managed and I can keep it at the core position FDIC sweep? For this new account, I can make sure it’s at zero dollars after the conversion, but the previous traditional IRA account, which again has only non-deductible contributions, I can keep it as is right? Pro-rata rules only apply if I have a mix of deductible and non-deductible contributions in traditional IRA, right?
Thanks! Ok so if you have any assets in Trad IRA, I’m pretty sure that the pro rata rule would apply, even if they are nondeductible contributions. But I’m not sure. If you have further questions, I recommend asking a financial professional for further clarification prior to doing a backdoor Roth IRA so you don’t do something that will affect you later down the line with taxes! You can use the same Trad IRA to Roth convert and don’t need to open a new one.
Thanks for the great video. @9:30 of your video, you to avoid the tax, "3. Have no other funds in other IRAs (excluding Roth/Inherited)". I don't understand this. Can you explain it? I have a Fidelity "Rollover IRA" account. Will it cause tax issues? Thanks in advance!
You’re welcome! Yes Rollover IRAs will cause tax issues. That IRA needs to have a $0 balance by Dec 31st for the backdoor Roth to work. Pleas consult with a financial professional to understand your options, which may include a Roth conversion ladder!
ThankQ . I moved 6500 to traditional IRA in November 2023 and planning to do backdoor roth now(feb 2024). Your ancillary #1 says to do it in same year.. is there any additional steps i need to do for my scenario?
Yes, you'll have to fill out Form 8606 a little differently because of this. I would follow the provided instructions with the form, but if it's confusing, definitely would recommend consulting with a financial professional to make sure it's filled out right!
I made the max deposit of $7,000 to my traditional IRA last month, which grew to about $7,013 from sitting in a money market. Do I still convert this entire balance? Or is this $13 considered capital gains?
Hey boss this is a great resource. This is my FIRST year having to do this because I exceed the MAGI limit in tax year 2022. Very quick question that I hope is straightforward enough: I am going through the process of doing this for tax year 2022, so let me know if I have this straight. I know I cannot directly do the Roth conversation for "tax year 2022" since I missed the December 31 2022 conversion deadline. Does that matter..? If I understand all this correctly (and going into Fidelity myself right now in Feb 2023), I'm able to still open/fund a Traditional IRA for tax year 2022. So two questions here: 1) Can the 2022 Traditional IRA funds that I just put $6k in, be transferred to my already-existing Fidelity Roth IRA (that I just started back in tax year 2021 so there's barely anything there) that simply, no questions asked? Or will it only let me do it as a contribution in my Roth IRA counting for tax year 2023? If there is no "specify which tax year" the transfer will take place and it just transfers the traditional ira monies straight to my roth ira account then great, (2) Am I still able to do my normal Roth IRA contribution for tax year 2023 (again, contribution, not transfer)? And yes, I expect to be under the MAGI limit when I do my taxes next year in 2023. Thanks!
Hey Tali! I'm glad you found the video helpful. Let me see if I can answer your questions. So for question #1, you still potentially could do a backdoor Roth IRA for 2022, but as this can get confusing, I would consult a CPA if you want to do this as the paperwork gets a little more difficult to complete correctly. It's easier to do the Roth contribution and conversion in the same tax year. Fidelity will let you do the 2022 contribution and conversion in 2023 without issue, but the tax implications are on you. Fidelity lets you choose the tax year you want to contribute to you and won't let you contribute any more than the maximum for that year. As for #2, you can do your normal contribution for the Roth IRA and will be under the MAGI limit in 2023 if you decided to do a backdoor Roth for 2022. Hope that answered your questions!
@@TheCreditFrog Completely understand and this is helpful. This seems pretty straight-forward. I did specify on my 2022 taxes that I am planning to contribute to a Traditional (not Roth) IRA account for tax year 2022 (before the April deadline), and because I make over the MAGI limit to qualify for a Traditional IRA deduction as well, there are NO deductions for me on my taxes that benefit me. If I proceed exactly how you did in the video with creating/funding the traditional IRA with NO gains on the account at all, and then transfer to my already-existing Roth IRA, I'm not seeing any tax implications (or how I need to pay taxes or how I benefitted by tax deductions since there were no deductions for me in my 2022 taxes, etc.) by doing this. And yes, I think the key factor is that Fidelity allows me to select 2022 tax year for funding my Traditional IRA and then easily allowing me to transfer those funds directly to my Roth, while still allowing me to contribute to 2023 Roth IRA (later on in year).
@@tali6144 Yup! If you want to do the backdoor Roth for your 2022 contribution, there's should be no tax issues, but you just want to be sure you fill out IRS Form 8606 correctly 👍!
You're welcome! Just to be clear, although you can do this at the end of the year, I recommend doing the Roth conversion at the beginning of the year. But it's nice to have all the contribution money saved up at the end of year so when the new year rolls around, you're ready to max out that IRA contribution!
Thanks, I followed the steps and opened the IRA and Cash Management accounts in fidelity I transferred funds from my bank to the Cash Management account and then to the Traditional IRA account. In the video, it looks like the Roth IRA account is missing. If I'm correct, should I also open a Roth IRA account and then transfer the amount from the Traditional IRA to the Roth IRA, followed by the Backdoor IRA as the last step? Is that correct?
The last step is to Roth convert your Trad IRA contribution to your Roth IRA. So yea, you will need a Roth IRA. There is no such thing as a backdoor Roth IRA. Backdoor Roth is the method not the account.
This was an excellent step by step guide Stanley! Roth IRAs are such a great addition to pretax retirement accounts.. I've been doing my backdoor roth IRA for the past few years with Vanguard.
Appreciate it Josh! Yeah, contributing to a Roth using the backdoor method is a pretty simple thing to do. Just gotta make sure that it won't trigger any tax complications! Vanguard is another great choice so that's awesome you've been contributing regularly to your Roth as well!
do we do the same steps each calendar year? Say I did in Oct 2023, and then next 6500 in Jan 2024. Also, what if I already have a Traditional 401k with Fidelity from my company? Can I do the conversion from that, or do I have to open another Traditional IRA account along with the Roth IRA? I assume you can only have one Traditional IRA within the same institution? And last, if I can move from my company 401k, dies that mean I have more to contribute to my 401k? Say I moved all $6500, so now I have a 6500 in my 401k to full back? Is this the right assumption?
Yes! So you would do these exact same steps every single year (unless the rules around this changes with new legislation) If you have a 401k with Fidelity, you could open up a Traditional IRA no problem! And for the last question, typically contributions are just that - contributions. So even if you move funds from one account to another, that doesn’t give you more contribution limit. Having said that, I’m not sure you can freely move 401k funds to a Rollover IRA unless you’re changing jobs so if you’re thinking of doing that, best to consult a financial professional to see what the best options are for you!
Thanks! I might missed it in the video, but did you explain the tax on the conversion from Traditional IRA to Roth? Cause that is important to consider if you already at a high tax bracket.
@aaronucsd The Backdoor Roth should generate $0 in taxes which is why it’s so powerful! Make sure you don’t have any other assets in pretax IRAs otherwise the pro rata rule will be in effect and you’ll have to pay some taxes on the conversion!
Thank you for the clear instruction. Very helpful. In you video, you went from Traditional IRA to Roth IRA almost immediately. Won’t this trigger the Step Transaction Doctrine from the IRS, which sees this as a single transaction from your account to Roth IRA, which is illegal for high earners? Shouldn’t you wait a month or two, if not longer to move the contribution from the Traditional IRA to the Roth IRA?
That's great Christian! Yeah, I had the same issue as well, and couldn't figure out how to get it to work otherwise. Some people said that they could Roth convert with SPAXX, but I'm happy to hear that I'm not alone with specific problem, hah!
Thank you so much for the detailed explanation! If for whatever reason, the money in the IRA goes up or down slightly due to markets/interest right before we do the conversion, does that affect the amount of paperwork we have to do? (i.e. is it still just filling out the one 8606 form?)
You’re welcome! No, it shouldn’t affect it that much. If the money goes up due to interest or capital gains, you’ll have to pay ordinary income tax on that difference, but that will still be reported on Form 8606.
Great video! Thank you so much! I just have a couple questions: 1. Can I skip step to put money from bank to CMA and instead put money from bank straight to Traditional IRA? 2. How can I make sure I put NON deductible money! I didn't see it in a video. Maybe I have to file some additional form for IRS? 3. Are you sure after all this get done you don't need to pay Tax on money you convert and on future gains from ROTH IRA? I appreciate it in advance
Sure thing! So 1. Yes you can skip this step, 2. You will fill out Form 8606 to declare it as a non-deductible contributions, 3. Yes, once the money has been Roth converted, any money gained in the Roth IRA will not be taxed.
@@TheCreditFrogOne more question my friend! If after conversion from Traditional IRA it's gonna be some interest accumulated I know you recommend it convert as well! So I should convert it like non deductible or deductible amount?
Does your TIRA start earning interest automatically and immediately? How do we avoid pro-rata? do we just convert/move the TIRA to RIRA same day it clears?
Yes it accrues the moment you put it in. Ideally, it is Roth converted ASAP, but if there’s a banking hold, a few days may be unaboidable. You just have to Roth convert the extra and pay taxes on that amount.
Hi, I’m starting on these … by mistake a opened a second ROTH IRA on fidelity, is that a problem? How do I delete the second one ? Help please. Thank you
What if I have an existing traditional ira with funds already in it. Does this mean I can't perform the backdoor roth conversion since I would need a traditional ira with 0 dollars?
Yes, that would be ideal because you'd trigger the pro-rata rule and pay taxes on your contribution anyways. If you are interested in doing the backdoor Roth in the future, I recommend speaking to a financial professional to discuss your options.
This is great, thank you so much! I have a question: When the money is finally transferred to the Roth IRA on fidelity through the backdoor Roth IRA process, do you then transfer the money in the Roth IRA to the mutual/index fund account you want to buy as the last step? for example, invest in FDKLX or AMAGX? because wouldn't the money just sit in the Roth IRA account as cash and therefore not accrue any interest?
Hi Stan! Thank you for the detailed video, very informative. I just performed my $6.5K contribution for the 2023 tax year to my traditional IRA. However, when I want to do the Roth conversion, my brokerage's system tells me that I can only do the conversion in the 2024 tax year. Can you please detail what was the reason you did these actions in the new year? Should I be concerned about potential tax implications considering the tax contribution was logged for 2023 but the conversion would be in the 2024 tax year or does the tax form 8606 account for this?
Hi Adam! I would check with your brokerage and see if they have characterized your contribution for tax year 2023 or 2024. For Fidelity, you're able to select which year you want your contribution to be. I performed the Roth conversion for 2023 in 2023 because it makes Form 8606 very easy to fill out if you do it this way. If you Roth convert a 2023 contribution in 2024 before April 15th, it's still ok, but it makes Form 8606 more complicated.
Do you need to have a cash management account to do this? Are we not allowed to transfer the money from our bank directly to the traditional IRA then convert that to the Roth IRA? Thank you
Hello Stan, thanks for sharing this video. As other commenters of said, this was explained claring and using a common application. It is clear and will help me to set up mine. Subscribed to support "The credit frog"
@TheCreditFrog - is it mandatory to have the CMA account with $0 rest of the year? Or can we have more than $10k funds in the account through out the year and transfer $7000 from it to Traditional IRA by December? Please advise.
You can have the CMA account with whatever amount you want throughout the year! It’s just like having a bank account, but within Fidelity to transfer to your Trad IRA.
Do you have to change the Traditional IRA core position from SPAXX to FDIC? Cant you just transfer from the from the SPAXX cash traditional IRA to Roth IRA?
Still missing a step for me. Next year when I want to do the same thing do I need to open another Roth IRA or do you just keep putting the traditional into the same Roth one each year with the max amount?
Is it too late to do a conversion for the 2023 Tax Year? I know that you can generally contribute to your Roth IRA through April 15 of the following year. However, it appears in your video that you cannot do a backdoor conversion in this similar April timeframe. Can you confirm that the cutoff date to do the conversion is December 30 of the same year you're attempting to contribute to? However, if I am able to do 2023 in January of 2024; is one able to then do the same thing for 2024 a week or so afterwards (both conversions taking place in Jan. 2024 but for two contribution years)? I hope that makes sense. Thank you!
Yes, you can do the backdoor Roth IRA for 2023 until April 15th! The only issue is filling out Form 8606, which is trickier when you do it this way. If you decide to pursue a backdoor Roth for 2023, I recommend speaking to a CPA for assistance to make sure the form is filled out correctly. You can also do a 2024 backdoor Roth as well! You just need to assign the contribution to the 2024 tax year. If you do the 2024 contribution, then you can follow along with this video and Form 8606 would be so much easier to complete.
@thecreditfrog your example for backdoor roth IRA in that video is for year 2023. Say that You’re done and already max’d out the contribution limit for 2023. So you are going to file the form 8606 for the roth conversion the next year (april 2024). Not april 2023 right?
Just did this today. I did put it in a previous rollover ira (traditional) that was funded. Is this against the pro rata rule? I planned to send the whole amount to my roth and complete the 8606 form.
@@TheCreditFrogthank you for responding, say it has over 7000 in it now will I be able to backdoor roth only 7000 or the whole amount? And paying tax on the previous traditional contributions?
@SavannahHibner when you do the Roth conversion, you’ll have to convert the entire amount. You’ll pay ordinary income tax on any capital gains from the previous $7k in that account.
This video was the most helpful video on RUclips about Roth IRA! Thanks again🙏🏽 I had about 22k in my Fidelity Rollover IRA. I opened a new Roth IRA account and transferred all the funds from Rollover IRA into the Roth last month. After couple weeks, I contributed 7K towards 2024 Roth contribution. I understand 2023 Roth contribution can be done until April 2024. My concern is if I'm still eligible to contribute towards 2023 Roth IRA since my Rollover IRA was not zero in Dec 2023?
You're welcome! Yeah, with your Rollover IRA Roth conversion and Roth IRA contribution in 2024, you will be taxed for ordinary income at $22k, but the Roth contribution will not be taxed. As for 2023, I would not perform a backdoor Roth as you still had assets in that Rollover IRA. I think if anything, you could potentially do just a straight-up non-deductible contribution to the Trad IRA for 2023, but then you'd have to Roth convert it in 2024 so you have $0 in that account for the 2024 backdoor Roth, and that would be taxed. You can consider just taking an L for the 2023 contribution, but of course, I would consult with a financial professional because there may be other options to consider that I'm not familiar with!
Hi Stan, this is an excellent resource for backdoor Roth conversion. Thanks so much for creating this. I did my Roth conversion for 2023 in November, I accrued $1.25 interest in Trad IRA and I did not Roth convert it. Trad IRA balance was $1.25 at the end of 31st Dec 2023. My current Trad IRA current balance is $1.25. For the 2024 roth conversion, should I Roth convert 7000 (including $1.25) from Trad IRA?
You're welcome! Glad you found it helpful. If you had $1.25 from last year, you should be able to contribute the full $7,000 in 2024 and then you can Roth convert $7,001.25, knowing that you'll pay ordinary income tax on that $1.25
Thanks for this video stan ! Just to be clear, this is for high-income earners who make more than the allowed threshold of $161,000. All you have to do is transfer it from the Traditional IRA to the Roth IRA to avoid any problems? Also, what happens if you decide to transfer money into your Traditional IRA and it accrues gains-can I transfer that into the Roth IRA, or does it have to be only the money I put into the account?
You're welcome! Yup, all you need to do is transfer money into the Trad IRA and then Roth convert that money to the Roth IRA, assuming you have no other assets in other IRAs like I mentioned in the video. If you accrue a little interest or gains, you can certainly also transfer that money into the Roth IRA too, but know that you'll be taxed on that amount over the contribution limit. This interest or gains is usually a few dollars if you only left the contribution in for several days so it shouldn't result in much additional taxes. Hope that helps!
You complete Form 8606 when you file your taxes for that tax year. So in 2025, you file your 2024 taxes so if your contribution was for 2024, that's when you would do it.
Great video! I didn’t know how to do this without possible tax consequences. Glad you mentioned that I can’t have any other IRAs because I have a traditional that has earnings so I will have to figure that one out.
I converted an old 401k to a traditional IRA last year. Can I fund that account the maximum contribution amount on January 1st, then transfer it to my Roth IRA account?
Yes you can, but unless you transfer all assets in your Trad IRA, then the pro rata rule will take effect and you won’t be able to do a Backdoor Roth. If you Roth convert old 401k assets, this may trigger a big tax bill, so definitely consult with a financial professional to see what your options are.
Thanks Stan, this is really helpful. I used your step by step info and just finished contribution for 2022. One thing I wanted to check. What shall be the core position after money is transferred to Roth? Should it be FDIC or SPAX?
Glad this video helped! It shouldn’t matter in the Roth because the money should be invested elsewhere after it gets in the Roth. FDIC and SPAXX are just places to hold your cash before it gets invested elsewhere!
I have a question, but btw this was one of the most helpful videos I've watched, thanks a ton! So basically, I contributed $6500 to my Roth IRA in 2023, however, while filing taxes on turbotax, I realized that I'm ineligible for Roth IRA in 2023 due to my income exceeding the limit. So the $6500 is technically an excess contribution. I think the options I have are to withdraw it, move it to a Traditional IRA, or do a Backdoor Roth IRA. With the help of your video, I went ahead and moved the $6500 to a Traditional IRA and the funds are cleared now. I just wanna check, is it ok to now go ahead and do a Roth conversion? If so, how will I account for the Back-door Roth IRA in turbotax? Lastly, just wanna double check, it's OK/legal for me to a do Back-door Roth IRA, even though I'm ineligible for a regular Roth IRA right?
You're welcome! I'm glad the video was helpful for you. Because you exceeded the income limit in 2023, but already contributed to your Roth in 2023, you need to speak to a CPA for further guidance. I don't have any advice for this since I'm not a tax professional, but what you described has to be redone very carefully, especially if you invested the funds and have capital gains. In 2024 and beyond, this video is how you would do your backdoor Roth to avoid this issue.
@@TheCreditFrog Ok thanks! I noticed some comments saying there's some funds left from accrued interest in their traditional IRA after the Roth conversion. Can these remaining funds also be Roth converted too even though I have technically maxed out the $6500?
No, you only need 1 Trad IRA and 1 Roth IRA to do this. If you already have a Trad IRA open with assets, I recommend you consult with a financial advisor to see what the best option for you would be.
@TheCreditFrog I made 2023 contribution into my Traditional IRA account 2 days back and until funds are not available to withdraw (will be available on 17th April 2024), I cannot tranfer from Traditional to ROTH. So, is it okay to perform ROTH conversion after 15th April 2024 for year 2023? Thanks!
Hi Jay. So time to withdraw funds and transfer funds aren't always the same. I would try to see if you could Roth convert those funds by April 15th. If you can't, the Roth conversion will count for 2024, and wouldn't be able to be used for a backdoor Roth in 2023.
@@huy3967 Great suggestion! That technique is a little more complicated with a lot more moving parts so that is something that I need to do a lot more research on!
I prefer to make monthly contributions. Is there any difference between doing a monthly conversion from traditional IRA to Roth IRA and then invest each month, or make a single max conversion to the roth IRA at the beginning of the year, and then invest a portion each month? Also, what do with the gained interest on the money held in the Traditional IRA before conversion? For example, lets say i contribute $500 to the traditional IRA and by the time I wait for it to clear, it earned 1$ in interest. Can I then convert $501 without taxes/penalty to Roth IRA, or only the $500 that was originally contributed? Thank you for the video!
There's no difference except you have to do that 12 times instead of once, which can be annoying to keep track of. In terms of the gained interest, you can Roth convert it, knowing that you'll pay ordinary income tax on it, but since it's a small amount, it's usually a negligible amount anyways.
@TheCreditFrog Thank you for your reply! For case management account (originally individual account), does it matter if I do have balance in the individual account for investment? I can transfer money to individual account, then just transfer the amount that I'll use for ROTH IRA conversion, correct? also how do we know if it is clear before transfer to IRA and then conversion? Thanks!
If you have a cash management account, that would be like a regular checking account so this would not count towards any investments. So you could transfer money from your bank into a cash management account (you could also transfer money directly from your bank into a Trad IRA) and then you could do a Roth conversion. The time it takes for the money to clear is variable, but usually ranges from 2-5 business days.
I have a SEP IRA that I contribute 25% to yearly. Will this affect the backdoor Roth IRA you discussed? You did mention step 3 that there should not be any other contribution to other IRA. My plan is to open a traditional IRA to go through the process you indicated. I will have $0 balance in the traditional IRA after the process. But will my already existing SEP IRA affect anything (Even though I am leaving my SEP IRA account alone) Please let me know if possible. TY
Hi, yes the SEP IRA is going to be an issue. Do not do the backdoor Roth IRA since it will trigger tax consequences if you have an existing SEP IRA like I mentioned in the video. Please speak to a financial professional to discuss your options.
Great video! A couple a questions if you don’t mind? I noticed you deposited the maximum allowable contribution once during the year. Is that because you put it in a High Yield Savings account to benefit your higher dividends through the year? Also can I contribute to Traditional IRA every paycheck and as long as I transfer all the $ to Roth at the end of the year then I’ll be ok? What if I don’t maximize the contribution amount antil tax deadline in April the following year? Can I do the same with the back door? Thanks!
Thanks! Yeah, so for your first question, yes, I typically save the following years' contribution in a HYSA so it gains interest before it gets contributed the following year. For the second question, yes you can contribute to Trad IRA and then Roth convert at the end if you want, but it's better to Roth convert when you contribute to Trad IRA because then you can invest the funds without worrying about paying taxes on any capital gains you may get throughout the year. For the third question, you can wait until Apr 15th, the following year, but it just makes the Form 8606 reported more complicated (still doable though). My preference is to contribute and Roth convert the same year as the tax year if you can. Hope that helps!
Is the fidelity cash management account deposit step necessary to make this work? Or can I just deposit money from my bank account into the Traditional IRA then convert the funds to the Roth account?
For higher-income earners, when transferring from traditional IRA to Roth IRA in order to do backdoor, Is it preferred to invest in the traditional IRA BEFORE doing the conversion? Or is it okay to invest AFTER conversion when it is in the Roth IRA?
It’s preferable to invest after you Roth convert so that there aren’t any capital gains that you’d have to pay ordinary income taxes on, which would trigger when you do the Roth conversion.
Thank you so much, excellent video! One question, I called fidelity this week and they told me they don't offer mega back door IRA contributions. Is this different? Do you use another company to hold the plan to allow for this? Thanks!
Thanks! Regarding mega Backdoor Roths, this is something that will be done using your 401k provider more than it would with your Roth IRA provider. You’ll need to see if your 401k provider offers in-service distributions and some other things. These can get very technical so I recommend you do this along with a financial professional because there are a lot of moving parts, and you don’t want to miss something!
Great video! I had to recharacterize $2.5k I've deposited into my Roth IRA earlier this year as I got a promotion and am now over the cap - but my question now is, should I wait for the $2.5k to appear in my Traditional IRA, and then add the additional $4k to get me to the $6.5k cap and transfer all of it to Roth IRA at once? Or should I handle the $2.5k conversion first, then on a clean slate deposit the $4k to traditional, then convert to Roth? Just making sure combining the two won't affect me
Thanks Romina! Recharacterizations can be tricky since it changes the tax reporting at the end of the year, depending on if that original contribution had any capital gains or not. Also, depending on if you already have existing assets in your Traditional IRA, this can get complex very fast. I recommend you speak to a financial or tax professional to see what the best options are for you so nothing is done incorrectly!
Thanks for the video. Very helpful! For yearly contributions, do you have to open a new roth ira account in 2024 that is different than 2023? Will this require you to manage x amount of accounts?
Great video! Quick question. I was unemployed in 2023 yet at the same time didn't qualify to contribute to IRA due to filing taxes jointly. So I am planning to open a backdoor Roth IRA, and keep my traditional IRA $0 just as your example above. Do I need to report this somewhere when filing my tax returns? Secondly, I mistakenly filed my tax returns already (without reporting my plans of opening a backdoor Roth IRA), does this mean I can open a backdoor Roth IRA only for 2024?
You report any Roth conversions on Form 8606. If you've already filed your tax returns already, you could either amend your tax return or you can just forego the contribution in 2023 and just focus on 2024. I would also highly recommend consulting a tax professional to figure out the best strategy for your own specific situation.
Hello - great video. Btw, one of my friends did a similar process but with Schwab. However when he did the transfer to Roth, withheld 10% and allowed only the remaining 90% to transfer. Can we avoid this penalty?
You have an option to withhold with Fidelity, but you can choose not to. For this strategy, it's better if you don't do a withholding in most cases, but if there are questions, consulting a financial professional would be prudent.
I currently have a Roth IRA account that I used in 2023 but my annual income exceeds the threshold to be eligible again in 2024. Trying to set up a back door Roth IRA like you displayed in this video. However, in order to do so, do I need to open a new Roth IRA account for the transfer or can I use the same Roth IRA account I have open from 2023?
Yup, you can use the same Roth IRA for the backdoor Roth IRA method! The biggest thing is to make sure there are $0 in assets in any Trad/SEP/SIMPLE/Rollover IRAs by Dec 31st of this year if you decide to proceed to avoid any taxes on that conversion.
I accidentally transfered from my cash management account to Roth IRA instead of doing it through the Traditional IRA first. What should I do now? Are there going to be just tax implications or am I in trouble in some other way? Any help is appreciated.
You can always transfer it back out again. Contributions can be moved freely between Roth accounts, but it's the capital gains that become an issue. Having said that, I'd recommend checking with a financial professional to see what's the best thing to do. I think it's as simple as moving the contribution back out (as long as it's done quickly before it's invested), but I may be missing something.
I had rolled over my old employer 401k to my own rollover IRA account as I was asked to move my 401k from them. Does this make me ineligible to open traditional IRA account and do back door Roth. Thank you!!
Yes, at this point you’d have to Roth convert those funds, but that would generate a large tax bill. If you want to do a backdoor Roth IRA, I would ask a financial planner for your best options, which may include a Roth conversion ladder.
Thank you for the great video. If I already had an older IRA account setup with fund saved to the account in previous years, is it better to open a new IRA and Roth accounts prior performing the same task?
You're welcome! From my perspective, it doesn't really matter, but it certainly helps if your Roth IRA and Trad IRA are both with the same custodian. Also, it's important to make sure that your older IRA (guessing it's Trad) has $0 in it by Dec 31st if you want to do a backdoor Roth. If not, definitely consult with a financial professional to figure out the best strategy to get there while minimizing your tax burden before attempting the backdoor Roth.
This is so helpful. What happens if I already have stock investments in Traditional non deductible IRA in fidelity account? How can I roll over to Roth IRA using backdoor strategy?
If you have assets in a Trad IRA already, it would be important to Roth convert those before proceeding with a backdoor Roth IRA. If you have a lot of assets, this may generate a large taxable event so in that case, it may be helpful to talk to a financial professional to see what your options are, for example, a Roth conversion ladder.
Greta video thank you! I'm confused, is it absolutely necessary to have the funds in the cash management account before January 1 or can you do it qll in the same year?
Thank you for a wonderful video, very well explained. Could you help with my question . I did a monthly contribution to my ROTH IRA but at the end of the year I found myself not qualified since my income had exceeded the ROTH limit. I plan to recharacterize that to traditional ROTH but what would I do with my growth ?
🌟 2024 UPDATE: The Roth Contribution limit is $7,000 ($8,000 for those 50 years and older)
It has also come to my attention that switching your core position to FDIC from SPAXX is not necessary when doing this backdoor Roth IRA strategy. However, some of you (like myself) were not able to do the final Roth conversion step and have found that switching the core position of the funds in the Traditional IRA from SPAXX to FDIC solved the issue. I don't know why this solution worked, but in any case, I presented it in this video to help any one else who encountered the same problem as me. In any case, happy retirement planning and let's make it a great 2024!
Does one have to wait between Cash Management/brokerage account to traditional and traditional to roth transfers? I talked to fidelity and they said you can do it immediately within seconds. Any implications of doing immediately?
@@sohilshrestha9506 I personally wait for funds to clear before doing a Roth conversion. I don't think there are any implications to doing it immediately, but it just gives me more peace of mind knowing that there's a record of my funds cleared in my Traditional IRA before it gets Roth converted. As for CMA/bank to Traditional IRA, I transfer it as soon as I'm ready.
This is the first time I will be doing it. I just want to avoid those pennies in interest. and make sure all the pitfalls are covered @@TheCreditFrog
Hey, thanks for the great video. If you do not have the money saved up at the start of the year, can you do this on a monthly basis as you get paid? Transfer the monthly breakdown of the new $7k limit ($583) into the traditional, and then immediately roll over every month, in order to put that money to work in the Roth IRA? Also can you still withdraw any contributions you make (not gains) to the roth IRA if you do it this way?
@@Ryanduncan27 Thanks! Yes, you can certainly do so. I would only say that Fidelity accrues interest at the end of the month so in order to keep the Trad IRA at $0 by Dec 31st, would recommend front loading contributions towards the end of the year so you can Roth convert any interest accrued before December.
As for contributions, I'm not entirely sure. I would ask a financial professional to make sure if this is ok.
I made this video in 2022 and a lot of people found it helpful, so I wanted to remake it even better 1 year later! Hope you enjoy and if you have any questions, leave a comment down below! 👇
Excellent video however, I am also a Fidelity user and I saw a flaw.
Do you have a fidelity cash management account which means when you deposit money into it it goes into a bank like interest-bearing account whereas I have the exact product except for mine is the brokerage account so when I deposit money it goes into the sweep account, which is SPAXX which earns a lot more interest
Other than that, this was hands-down, one of the best videos on the subject. I can’t wait for your new update come out.
@@missouri6014 Thanks! Yeah, using SPAXX is actually going to earn you more interest for sure, but really the CMA is meant only to be a temporary holding account for the funds until they get ultimately get transferred to the Trad IRA, then Roth IRA, and then gets invested immediately. So you're definitely right about that, but since the money is in there for such a short time, I thought it was ok. Appreciate the feedback and glad you found the video to be helpful!
@john-d1775 No prob! There is no maximum limit to a Roth conversion, but (as far as I know) you can only Roth convert up to the annual contribution limit without triggering a taxable event. If you Roth convert a larger amount, the remainder will be taxed as ordinary income.
Quick question how do you calculate your MAGI? I got a raise mid year last year and I’m not sure if that puts me over the limit for the Roth IRA
@@karlasanchez2422 There's a lot that goes into that. I would recommend you speak to a financial professional if you have specific questions.
This is exactly what I was looking for. The amount of detail you provided was perfect. I was thinking how to I change my core position and then you showed how! Fantastic content.
The only thing could add is information on the required forms to submit with your Tax return.
Thanks Donovan! I'm glad you found the content helpful, and I know that it can be somewhat confusing to change your core position so I'm happy that this was helpful as well!
Yes, this could be a helpful thing to explain. Maybe in a future video!
@user-tm1kb3fq4m It’s a pretty simple process, but if I ever make an updated video, I’ll be sure to include it👍!
This was the easiest way anyone has explained this process that I’ve seen. Thank you. I was nervous about this process but now it doesn’t seem so scary
You're welcome Jonathan! I'm glad that you found the video to be helpful!
Probably the best walkthrough I have watched! Thank you!
You’re welcome! Glad you found the video helpful!
Dude your video is right to the point, clear and easy to follow. Love it. Subscribed!
Hey, thanks! I’m glad you found it helpful, and I appreciate your support 👍!
Perfect! This is what I've been looking for when it comes to a step by step explanation. Thank you!
Of course, Peter! Glad you found it helpful!
Wow, what an amazing video. Perfectly executed with clear, simple instructions and illustrations. Perfect editing too. Great job man!!!! Thank you 👍🏼
Thank you so much! I appreciate your kind words. Glad I could help you out with this video!
Same! This made the process so understandable! Thank you!!! Do you know if if in a back door IRA conversion if each conversion/contribution has to be in there for 5 years before tax free?
@@la54578 No problem! I'm not entirely sure about the 5-year rule. I'm pretty sure it applies to this as well because you're doing a Roth conversion of your contribution so it technically counts as a conversion. But if you wanted a true answer, I would speak to a financial professional.
I've been so worried about this process but this video made it so simple! Thanks for the step by step!!!
Of course! No problem, and I'm glad I could help you out!
bro is sitting there talking about making too much money in income each year to directly contribute to a roth ira while wearing a figs jacket on what a GOAT! thanks for explaining it so clearly man keep up the good work
You're welcome! Glad you found the video helpful!
Great video! I made the mistake of contributing directly to the traditional IRA and then I had to wait to move it to the Roth IRA and the cash accumulated $4 of interest which then showed up on a tax form and I had to report it as income which seemed stupid 🤦♂️.
Next year I'll definitely make sure to contribute to my CMA first and let it settle before transferring.
Yeah, it’s super annoying when it does that. They key is to do the Roth conversion the moment the funds hit your Traditional IRA. I do this the same day and still got $.60 of interest at the time, but the IRS rounds down so it shows up on my Form 8606 as negligible hah!
@@TheCreditFrog What are you planning to do with the $.60 of interest? Are you going to withdraw it or keep it in the traditional IRA account? Thanks!
@AustenOw Roth convert it. I’ll have to pay ordinary income tax on it but that would be a small amount.
@@TheCreditFrog Thank you! There is $.85 of interest in my traditional IRA account left over after my conversion. Would it be an issue if I just transferred that .85 to my CMA or other bank account? Or is it mandatory that the $.85 be converted also? Thanks again. I'm a subscriber!
@aau_626 Yeah, I wouldn’t withdraw any interest from your Traditional IRA if you could help it. Usually not a great idea. I’m not a financial professional, so I’m not super familiar with the specific consequences, but I would just Roth convert those funds to keep it simple. Thanks, I really appreciate the support!
Great step-by-step video. However, the last and most important thing is to invest that money which was converted to some good MFs.
Thanks! Yes, investing those funds after the Roth conversion is very important too!
This was a super helpful video. I've always been curious as to how to actually perform one of these. Since I am still eligible to contribute to a Roth IRA without needing to use the backdoor method, I'm set for now, but this will be super good to look back on in the future. Now I just gotta get my income up!
Glad you found the video helpful Spencer! Yes, it's a retirement strategy that is pretty simple to understand and can be very helpful to get some more money into that Roth once you're over the income limit! You'll be over this limit sooner than you think, and when that time comes, you'll know exactly how to handle this situation 👍. Also Green looks great on you 🤩!
@@TheCreditFrog I'm excited for the day! And I'm loving that green badge. Definitely looks nice!
Though this video is a little old, I just stumbled upon it. This is GOLD. Thank you so much
You’re welcome! Glad you found it helpful!
Great information Stan! I can definitely see this video being an evergreen video based on how clear and well explained the information is!
Thanks Eric! Yeah, I hope that this video will help anyone that is trying to perform a backdoor Roth with Fidelity. It was super confusing the first time I tried to do it so hopefully others can learn from this video!
Thank you for this video. I've been feeling quite intimidated about this process. I've read a lot of blogs about this process and they make it seem super complicated. Thank you for this video because you showed that it's all very simple and straightforward. Definitely calmed my nerves for sure. Thank you!
You’re welcome! Happy to hear you found this video to be helpful!
This is an awesome video here Stan! And even though I'm not currently in the high-income bracket, it'll surely be super helpful for all those high-income earners that make more than $138K and still want to contribute to a Roth.
Thanks Matt! I know you will get there soon! Although since you’re getting married this year, the numbers may change in your favor. If anything, this video will be here when you need it!
Wonderfully explained and so much easier to do this on Fidelity than the Vanguard site. Thank you.
You're welcome! Glad to hear that it's much easier over on Fidelity!
What a great video, Stan! Thank you so much. Quick question: I have both a SEP and traditional IRA. From my understanding, the SEP limit is based on your self-employed income, however I keep reading that the limit for all IRA contributions is $6,500 for 2023. Can you explain that better or if there is something I may be missing? Additionally to avoid pro rata, I would still need to make sure that both the SEP and traditional IRA balances are zero by the end of the year that I completed the conversion to Roth correct?
Hi Selby! Of course, glad you enjoyed the video. The SEP limit ($61k in 2022) is separate from the Roth IRA limit. And yes, to avoid pro rata, both Traditional IRA and SEP IRA must be zero by 12/31!
I have 2 different old IRAs. Just to make sure, can I transfer them both in Roth IRAs in January 2024?
Even I understood this video. Thank you for keeping it simple for the novice.
You're welcome! I'm glad I could help you out!
first!
You got first Josh! 🥇
Thanks for the video, Stan. I successfully did my first backdoor Roth IRA for 2023 using your video last year. The only difference I got from your video was that while waiting a few days for the $6,500 funds to clear in my traditional IRA before transferring them to a Roth IRA, I earned around 6 dollars in interest. Now that I want to contribute to the Backdoor Roth IRA for 2024 ($7000), I am unsure about what to do with the remaining 6 dollars in my traditional IRA.
That's awesome! Yeah, the backdoor Roth is just something you do every year, but once you do it once, it gets pretty routine! As for the $6 in interest, you can definitely Roth convert those funds with no problem. You'll have to pay ordinary income tax on that $6, but that shouldn't be too bad. In the future, you can Roth convert the entire amount + interest in the same year so that your Trad IRA has $0 on Dec 31st. That will make filling out Form 8606 much simpler when you file your taxes!
Quick question - so once you transfer all the funds to the Roth account, you just the traditional Ira open with $0 bal until the following year when you go through this whole process again? I just want to confirm. This video is very helpful. Thank you.
@@mching7282 Yes, that is exactly what you do!
Immediate new subscriber just from this one video, thank you so much for being so thorough and guiding us through step-by-step style by showing us, instead of just talking about it.
Of course! I’m glad that this video was helpful, and I appreciate your support!
Best training after watching 20 others. Thanks!
You're welcome! Glad you found it helpful!
Thanks for making this video. This is really helping out. When I called Fidelity, they said doing a backdoor Roth IRA would be easy. But after watching your RUclips video and reading most of the comments with people's questions, I found out about my mistakes. I had a rollover IRA from previous jobs and tried to do a backdoor IRA while leaving the rollover IRA. But as the comments said, I should transfer the money. So I transferred the rollover IRA to my 403(b) to avoid tax. I wouldn't have thought about this until I read most of the comments with your answers. That really helped me a lot. Anyway, thanks so much for making this video. I have a question about the time frame for a backdoor IRA. You said that it takes a few days to be eligible to transfer from a traditional IRA to a Roth IRA, but after a week, it still didn't work. So I called Fidelity, and they said I have to wait for 16 days after the money settles in my traditional IRA. Is it true that it takes so long, like three weeks, to transfer money from a traditional IRA to a Roth IRA? That means I might have some interest during that time, right?
Thanks! Yeah it depends on the bank how long it will take to clear. You will certainly accrue interest during this time, but you can Roth convert that amount too and just pay ordinary income tax on that interest.
thanks for the video!, just as an FYI, you don't need to convert to your Core position on Traditional IRA from SPAXX to FDIC-Insured Deposit Sweep Program, it is possible Traditional IRA with core in SPAXX direct to ROTH IRA
You're welcome Gabriel! Glad you found the video helpful! Thanks for the tip. Yeah, it seems like converting to FDIC isn't necessary, but for some reason SPAXX wasn't working for me. I'm glad it worked for you, and a lot of others have mentioned the same!
Thanks for making this simple. Articles make it seem so difficult and confusing with technical jargon. Subbed
You're welcome! Glad you found the video helpful. Appreciate the support!
Great video.Easy to follow step-by-step process!
I have a question. I have an existing traditional IRA in which all contributions in the past years have been using non-deductible contributions. However it is a managed account.
So for doing the backdoor ROTH contributions, should I open a new traditional IRA, which is not managed and I can keep it at the core position FDIC sweep?
For this new account, I can make sure it’s at zero dollars after the conversion, but the previous traditional IRA account, which again has only non-deductible contributions, I can keep it as is right? Pro-rata rules only apply if I have a mix of deductible and non-deductible contributions in traditional IRA, right?
Thanks! Ok so if you have any assets in Trad IRA, I’m pretty sure that the pro rata rule would apply, even if they are nondeductible contributions. But I’m not sure. If you have further questions, I recommend asking a financial professional for further clarification prior to doing a backdoor Roth IRA so you don’t do something that will affect you later down the line with taxes! You can use the same Trad IRA to Roth convert and don’t need to open a new one.
Thanks for the great video. @9:30 of your video, you to avoid the tax, "3. Have no other funds in other IRAs (excluding Roth/Inherited)". I don't understand this. Can you explain it? I have a Fidelity "Rollover IRA" account. Will it cause tax issues? Thanks in advance!
You’re welcome! Yes Rollover IRAs will cause tax issues. That IRA needs to have a $0 balance by Dec 31st for the backdoor Roth to work. Pleas consult with a financial professional to understand your options, which may include a Roth conversion ladder!
ThankQ . I moved 6500 to traditional IRA in November 2023 and planning to do backdoor roth now(feb 2024). Your ancillary #1 says to do it in same year.. is there any additional steps i need to do for my scenario?
Yes, you'll have to fill out Form 8606 a little differently because of this. I would follow the provided instructions with the form, but if it's confusing, definitely would recommend consulting with a financial professional to make sure it's filled out right!
Great video. Thanks for the clear explanation of step by step process.
You’re welcome Sony! Glad you found it helpful!
That was super easy to understand and I’ll be setting this up bc my 401k and brokerage acct is already with fidelity.
Awesome! That will make tracking all your retirement accounts easy
I made the max deposit of $7,000 to my traditional IRA last month, which grew to about $7,013 from sitting in a money market. Do I still convert this entire balance? Or is this $13 considered capital gains?
Yes you’ll convert the entire balance and have to pay ordinary income tax on that $13
Hey boss this is a great resource. This is my FIRST year having to do this because I exceed the MAGI limit in tax year 2022.
Very quick question that I hope is straightforward enough:
I am going through the process of doing this for tax year 2022, so let me know if I have this straight. I know I cannot directly do the Roth conversation for "tax year 2022" since I missed the December 31 2022 conversion deadline. Does that matter..? If I understand all this correctly (and going into Fidelity myself right now in Feb 2023), I'm able to still open/fund a Traditional IRA for tax year 2022. So two questions here: 1) Can the 2022 Traditional IRA funds that I just put $6k in, be transferred to my already-existing Fidelity Roth IRA (that I just started back in tax year 2021 so there's barely anything there) that simply, no questions asked? Or will it only let me do it as a contribution in my Roth IRA counting for tax year 2023? If there is no "specify which tax year" the transfer will take place and it just transfers the traditional ira monies straight to my roth ira account then great, (2) Am I still able to do my normal Roth IRA contribution for tax year 2023 (again, contribution, not transfer)? And yes, I expect to be under the MAGI limit when I do my taxes next year in 2023.
Thanks!
Hey Tali! I'm glad you found the video helpful. Let me see if I can answer your questions.
So for question #1, you still potentially could do a backdoor Roth IRA for 2022, but as this can get confusing, I would consult a CPA if you want to do this as the paperwork gets a little more difficult to complete correctly. It's easier to do the Roth contribution and conversion in the same tax year. Fidelity will let you do the 2022 contribution and conversion in 2023 without issue, but the tax implications are on you. Fidelity lets you choose the tax year you want to contribute to you and won't let you contribute any more than the maximum for that year.
As for #2, you can do your normal contribution for the Roth IRA and will be under the MAGI limit in 2023 if you decided to do a backdoor Roth for 2022.
Hope that answered your questions!
@@TheCreditFrog Completely understand and this is helpful. This seems pretty straight-forward. I did specify on my 2022 taxes that I am planning to contribute to a Traditional (not Roth) IRA account for tax year 2022 (before the April deadline), and because I make over the MAGI limit to qualify for a Traditional IRA deduction as well, there are NO deductions for me on my taxes that benefit me. If I proceed exactly how you did in the video with creating/funding the traditional IRA with NO gains on the account at all, and then transfer to my already-existing Roth IRA, I'm not seeing any tax implications (or how I need to pay taxes or how I benefitted by tax deductions since there were no deductions for me in my 2022 taxes, etc.) by doing this. And yes, I think the key factor is that Fidelity allows me to select 2022 tax year for funding my Traditional IRA and then easily allowing me to transfer those funds directly to my Roth, while still allowing me to contribute to 2023 Roth IRA (later on in year).
@@tali6144 Yup! If you want to do the backdoor Roth for your 2022 contribution, there's should be no tax issues, but you just want to be sure you fill out IRS Form 8606 correctly 👍!
Best video explanation on backdoor roth conversion!
Thank you! I'm glad you found it helpful!
Thank You ! Perfect details in your video . perfectly explain its enough information about how to increase funds position in fidelity .
You’re welcome! Glad you found the video helpful!
Good stuff. Looking to do just this. You made this clear to me this is done at the end of the year. Sweet. Thanks for sharing
You're welcome! Just to be clear, although you can do this at the end of the year, I recommend doing the Roth conversion at the beginning of the year. But it's nice to have all the contribution money saved up at the end of year so when the new year rolls around, you're ready to max out that IRA contribution!
Thanks, I followed the steps and opened the IRA and Cash Management accounts in fidelity I transferred funds from my bank to the Cash Management account and then to the Traditional IRA account. In the video, it looks like the Roth IRA account is missing. If I'm correct, should I also open a Roth IRA account and then transfer the amount from the Traditional IRA to the Roth IRA, followed by the Backdoor IRA as the last step? Is that correct?
The last step is to Roth convert your Trad IRA contribution to your Roth IRA. So yea, you will need a Roth IRA. There is no such thing as a backdoor Roth IRA. Backdoor Roth is the method not the account.
Awesome best I've watched paying attention to details and situational awareness 👍🏼👍🏼
Thanks! I really appreciate your support, and glad you found the video helpful!
This was an excellent step by step guide Stanley! Roth IRAs are such a great addition to pretax retirement accounts.. I've been doing my backdoor roth IRA for the past few years with Vanguard.
Appreciate it Josh! Yeah, contributing to a Roth using the backdoor method is a pretty simple thing to do. Just gotta make sure that it won't trigger any tax complications! Vanguard is another great choice so that's awesome you've been contributing regularly to your Roth as well!
@@TheCreditFroghow do you make sure it doesn’t flag any tax contributions ?
@@mikelaary911 Not sure if this answers your question, but Fidelity won’t let you contribute more than allowed for the year.
do we do the same steps each calendar year? Say I did in Oct 2023, and then next 6500 in Jan 2024.
Also, what if I already have a Traditional 401k with Fidelity from my company? Can I do the conversion from that, or do I have to open another Traditional IRA account along with the Roth IRA? I assume you can only have one Traditional IRA within the same institution?
And last, if I can move from my company 401k, dies that mean I have more to contribute to my 401k? Say I moved all $6500, so now I have a 6500 in my 401k to full back? Is this the right assumption?
Yes! So you would do these exact same steps every single year (unless the rules around this changes with new legislation)
If you have a 401k with Fidelity, you could open up a Traditional IRA no problem!
And for the last question, typically contributions are just that - contributions. So even if you move funds from one account to another, that doesn’t give you more contribution limit. Having said that, I’m not sure you can freely move 401k funds to a Rollover IRA unless you’re changing jobs so if you’re thinking of doing that, best to consult a financial professional to see what the best options are for you!
Thanks! I might missed it in the video, but did you explain the tax on the conversion from Traditional IRA to Roth? Cause that is important to consider if you already at a high tax bracket.
@aaronucsd The Backdoor Roth should generate $0 in taxes which is why it’s so powerful! Make sure you don’t have any other assets in pretax IRAs otherwise the pro rata rule will be in effect and you’ll have to pay some taxes on the conversion!
so helpful! Thanks for breaking it down step by step
You’re welcome! Happy you found it helpful!
Subscribed. this is the clearest video on the subject so far.
Thank you! I'm glad you found the video helpful!
Thank you for the clear instruction. Very helpful. In you video, you went from Traditional IRA to Roth IRA almost immediately. Won’t this trigger the Step Transaction Doctrine from the IRS, which sees this as a single transaction from your account to Roth IRA, which is illegal for high earners? Shouldn’t you wait a month or two, if not longer to move the contribution from the Traditional IRA to the Roth IRA?
You’re welcome! If you’d like an explanation to that, I’d recommend speaking to a lawyer or tax professional!
Thank you for making this video clear and step by step
No problem. Glad you found it helpful!
Thank you - very helpful
You're welcome!
Thanks! Changing the core position was the step I was missing in getting this to work and only found that info here :)
That's great Christian! Yeah, I had the same issue as well, and couldn't figure out how to get it to work otherwise. Some people said that they could Roth convert with SPAXX, but I'm happy to hear that I'm not alone with specific problem, hah!
Thank you so much for the detailed explanation! If for whatever reason, the money in the IRA goes up or down slightly due to markets/interest right before we do the conversion, does that affect the amount of paperwork we have to do? (i.e. is it still just filling out the one 8606 form?)
You’re welcome! No, it shouldn’t affect it that much. If the money goes up due to interest or capital gains, you’ll have to pay ordinary income tax on that difference, but that will still be reported on Form 8606.
Great video! Thank you so much!
I just have a couple questions:
1. Can I skip step to put money from bank to CMA and instead put money from bank straight to Traditional IRA?
2. How can I make sure I put NON deductible money! I didn't see it in a video. Maybe I have to file some additional form for IRS?
3. Are you sure after all this get done you don't need to pay Tax on money you convert and on future gains from ROTH IRA?
I appreciate it in advance
Sure thing! So 1. Yes you can skip this step, 2. You will fill out Form 8606 to declare it as a non-deductible contributions, 3. Yes, once the money has been Roth converted, any money gained in the Roth IRA will not be taxed.
@@TheCreditFrogthank you so much sir!
@@TheCreditFrogOne more question my friend! If after conversion from Traditional IRA it's gonna be some interest accumulated I know you recommend it convert as well! So I should convert it like non deductible or deductible amount?
@@levastories8025 Convert it as a nondeductible amount. This will show up on the same form 8606 so it will be simple!
Does your TIRA start earning interest automatically and immediately? How do we avoid pro-rata? do we just convert/move the TIRA to RIRA same day it clears?
Yes it accrues the moment you put it in. Ideally, it is Roth converted ASAP, but if there’s a banking hold, a few days may be unaboidable. You just have to Roth convert the extra and pay taxes on that amount.
Hi, I’m starting on these … by mistake a opened a second ROTH IRA on fidelity, is that a problem? How do I delete the second one ? Help please. Thank you
Hi Nuris, no it shouldn’t be a problem. I would call Fidelity and just ask them the close the extra Roth IRA as you opened it by mistake!
Dammit! How have I missed this for so many years! Just did it. Thanks!
No problem! Hey, as long as you get started, that’s what’s most important!
What if I have an existing traditional ira with funds already in it. Does this mean I can't perform the backdoor roth conversion since I would need a traditional ira with 0 dollars?
Yes, that would be ideal because you'd trigger the pro-rata rule and pay taxes on your contribution anyways. If you are interested in doing the backdoor Roth in the future, I recommend speaking to a financial professional to discuss your options.
This is very helpful! Do you follow the same steps if I want to contribute monthly versus yearly?
Yup! Just follow the same steps, and make sure you have $0 in the Trad IRA by Dec 31st.
Wonderful explanation!
Also, I love the model ✈️
Thank you! Haha, I appreciate it! ✈️
This is great, thank you so much! I have a question:
When the money is finally transferred to the Roth IRA on fidelity through the backdoor Roth IRA process, do you then transfer the money in the Roth IRA to the mutual/index fund account you want to buy as the last step? for example, invest in FDKLX or AMAGX? because wouldn't the money just sit in the Roth IRA account as cash and therefore not accrue any interest?
You’re welcome! Yes, after doing the backdoor Roth IRA, you need to invest these funds so that they can grow over time.
Hi Stan! Thank you for the detailed video, very informative.
I just performed my $6.5K contribution for the 2023 tax year to my traditional IRA. However, when I want to do the Roth conversion, my brokerage's system tells me that I can only do the conversion in the 2024 tax year.
Can you please detail what was the reason you did these actions in the new year? Should I be concerned about potential tax implications considering the tax contribution was logged for 2023 but the conversion would be in the 2024 tax year or does the tax form 8606 account for this?
Hi Adam! I would check with your brokerage and see if they have characterized your contribution for tax year 2023 or 2024. For Fidelity, you're able to select which year you want your contribution to be.
I performed the Roth conversion for 2023 in 2023 because it makes Form 8606 very easy to fill out if you do it this way. If you Roth convert a 2023 contribution in 2024 before April 15th, it's still ok, but it makes Form 8606 more complicated.
Do you need to have a cash management account to do this? Are we not allowed to transfer the money from our bank directly to the traditional IRA then convert that to the Roth IRA? Thank you
No you don’t need a CMA. You can transfer to the Trad IRA directly from your bank account.
Hello Stan, thanks for sharing this video. As other commenters of said, this was explained claring and using a common application. It is clear and will help me to set up mine. Subscribed to support "The credit frog"
I appreciate that! Thank you so much for your support, and glad I could help you set up your own backdoor Roth IRA!
@TheCreditFrog - is it mandatory to have the CMA account with $0 rest of the year? Or can we have more than $10k funds in the account through out the year and transfer $7000 from it to Traditional IRA by December? Please advise.
You can have the CMA account with whatever amount you want throughout the year! It’s just like having a bank account, but within Fidelity to transfer to your Trad IRA.
Do you have to change the Traditional IRA core position from SPAXX to FDIC? Cant you just transfer from the from the SPAXX cash traditional IRA to Roth IRA?
You don’t have to as I explained in the pinned comment, but it could be potential workaround if Fidelity doesn’t let you do the Roth conversion!
Amazing video - thank you so much for explaining this so clearly.
You're welcome! Glad you found it helpful!
Still missing a step for me. Next year when I want to do the same thing do I need to open another Roth IRA or do you just keep putting the traditional into the same Roth one each year with the max amount?
You can use the same accounts.
Is it too late to do a conversion for the 2023 Tax Year? I know that you can generally contribute to your Roth IRA through April 15 of the following year. However, it appears in your video that you cannot do a backdoor conversion in this similar April timeframe. Can you confirm that the cutoff date to do the conversion is December 30 of the same year you're attempting to contribute to? However, if I am able to do 2023 in January of 2024; is one able to then do the same thing for 2024 a week or so afterwards (both conversions taking place in Jan. 2024 but for two contribution years)? I hope that makes sense. Thank you!
Yes, you can do the backdoor Roth IRA for 2023 until April 15th! The only issue is filling out Form 8606, which is trickier when you do it this way. If you decide to pursue a backdoor Roth for 2023, I recommend speaking to a CPA for assistance to make sure the form is filled out correctly.
You can also do a 2024 backdoor Roth as well! You just need to assign the contribution to the 2024 tax year. If you do the 2024 contribution, then you can follow along with this video and Form 8606 would be so much easier to complete.
@thecreditfrog your example for backdoor roth IRA in that video is for year 2023. Say that You’re done and already max’d out the contribution limit for 2023. So you are going to file the form 8606 for the roth conversion the next year (april 2024). Not april 2023 right?
Subscribed. Great video step by step guide.
Thanks! Glad you found the video helpful!
Just recently recharacterized my Roth IRA to Trad IRA, and a few weeks later I did the backdoor Roth.
Great!
Just did this today. I did put it in a previous rollover ira (traditional) that was funded. Is this against the pro rata rule? I planned to send the whole amount to my roth and complete the 8606 form.
@@SavannahHibner as long as this is the only Trad IRA or equivalent you have with assets in it, it should be ok
@@TheCreditFrogthank you for responding, say it has over 7000 in it now will I be able to backdoor roth only 7000 or the whole amount? And paying tax on the previous traditional contributions?
@SavannahHibner when you do the Roth conversion, you’ll have to convert the entire amount. You’ll pay ordinary income tax on any capital gains from the previous $7k in that account.
This video was the most helpful video on RUclips about Roth IRA! Thanks again🙏🏽
I had about 22k in my Fidelity Rollover IRA. I opened a new Roth IRA account and transferred all the funds from Rollover IRA into the Roth last month. After couple weeks, I contributed 7K towards 2024 Roth contribution.
I understand 2023 Roth contribution can be done until April 2024. My concern is if I'm still eligible to contribute towards 2023 Roth IRA since my Rollover IRA was not zero in Dec 2023?
You're welcome! Yeah, with your Rollover IRA Roth conversion and Roth IRA contribution in 2024, you will be taxed for ordinary income at $22k, but the Roth contribution will not be taxed. As for 2023, I would not perform a backdoor Roth as you still had assets in that Rollover IRA. I think if anything, you could potentially do just a straight-up non-deductible contribution to the Trad IRA for 2023, but then you'd have to Roth convert it in 2024 so you have $0 in that account for the 2024 backdoor Roth, and that would be taxed. You can consider just taking an L for the 2023 contribution, but of course, I would consult with a financial professional because there may be other options to consider that I'm not familiar with!
@@TheCreditFrogThank you for the reply!
Hi Stan, this is an excellent resource for backdoor Roth conversion. Thanks so much for creating this. I did my Roth conversion for 2023 in November, I accrued $1.25 interest in Trad IRA and I did not Roth convert it. Trad IRA balance was $1.25 at the end of 31st Dec 2023. My current Trad IRA current balance is $1.25. For the 2024 roth conversion, should I Roth convert 7000 (including $1.25) from Trad IRA?
You're welcome! Glad you found it helpful. If you had $1.25 from last year, you should be able to contribute the full $7,000 in 2024 and then you can Roth convert $7,001.25, knowing that you'll pay ordinary income tax on that $1.25
Thanks for this video stan !
Just to be clear, this is for high-income earners who make more than the allowed threshold of $161,000. All you have to do is transfer it from the Traditional IRA to the Roth IRA to avoid any problems? Also, what happens if you decide to transfer money into your Traditional IRA and it accrues gains-can I transfer that into the Roth IRA, or does it have to be only the money I put into the account?
You're welcome! Yup, all you need to do is transfer money into the Trad IRA and then Roth convert that money to the Roth IRA, assuming you have no other assets in other IRAs like I mentioned in the video. If you accrue a little interest or gains, you can certainly also transfer that money into the Roth IRA too, but know that you'll be taxed on that amount over the contribution limit. This interest or gains is usually a few dollars if you only left the contribution in for several days so it shouldn't result in much additional taxes. Hope that helps!
Great video! Easy to understand and follow along. I appreciate you!
Of course! Glad you found it helpful!
Whats about form you need to feel it up before to do this step? 8606 ? When you fill it up
You complete Form 8606 when you file your taxes for that tax year. So in 2025, you file your 2024 taxes so if your contribution was for 2024, that's when you would do it.
Great video! I didn’t know how to do this without possible tax consequences. Glad you mentioned that I can’t have any other IRAs because I have a traditional that has earnings so I will have to figure that one out.
Thanks! Yup, probably best to speak to a financial professional to see what your options are if you wanted to do this strategy.
I converted an old 401k to a traditional IRA last year. Can I fund that account the maximum contribution amount on January 1st, then transfer it to my Roth IRA account?
Yes you can, but unless you transfer all assets in your Trad IRA, then the pro rata rule will take effect and you won’t be able to do a Backdoor Roth. If you Roth convert old 401k assets, this may trigger a big tax bill, so definitely consult with a financial professional to see what your options are.
I appreciate the quick response.
Thanks Stan, this is really helpful. I used your step by step info and just finished contribution for 2022. One thing I wanted to check. What shall be the core position after money is transferred to Roth? Should it be FDIC or SPAX?
Glad this video helped! It shouldn’t matter in the Roth because the money should be invested elsewhere after it gets in the Roth. FDIC and SPAXX are just places to hold your cash before it gets invested elsewhere!
I have a question, but btw this was one of the most helpful videos I've watched, thanks a ton!
So basically, I contributed $6500 to my Roth IRA in 2023, however, while filing taxes on turbotax, I realized that I'm ineligible for Roth IRA in 2023 due to my income exceeding the limit. So the $6500 is technically an excess contribution. I think the options I have are to withdraw it, move it to a Traditional IRA, or do a Backdoor Roth IRA. With the help of your video, I went ahead and moved the $6500 to a Traditional IRA and the funds are cleared now.
I just wanna check, is it ok to now go ahead and do a Roth conversion?
If so, how will I account for the Back-door Roth IRA in turbotax?
Lastly, just wanna double check, it's OK/legal for me to a do Back-door Roth IRA, even though I'm ineligible for a regular Roth IRA right?
You're welcome! I'm glad the video was helpful for you. Because you exceeded the income limit in 2023, but already contributed to your Roth in 2023, you need to speak to a CPA for further guidance. I don't have any advice for this since I'm not a tax professional, but what you described has to be redone very carefully, especially if you invested the funds and have capital gains. In 2024 and beyond, this video is how you would do your backdoor Roth to avoid this issue.
@@TheCreditFrog Ok thanks! I noticed some comments saying there's some funds left from accrued interest in their traditional IRA after the Roth conversion. Can these remaining funds also be Roth converted too even though I have technically maxed out the $6500?
@@saipurush99 For 2024, yes, that would be what you should do. For 2023, you need to speak to a tax professional to unwind this correctly.
So, Do i need to open a new fidelity account with new traditional IRA as my current fidelity has existing IRA balance in it?
No, you only need 1 Trad IRA and 1 Roth IRA to do this. If you already have a Trad IRA open with assets, I recommend you consult with a financial advisor to see what the best option for you would be.
@TheCreditFrog I made 2023 contribution into my Traditional IRA account 2 days back and until funds are not available to withdraw (will be available on 17th April 2024), I cannot tranfer from Traditional to ROTH. So, is it okay to perform ROTH conversion after 15th April 2024 for year 2023? Thanks!
Hi Jay. So time to withdraw funds and transfer funds aren't always the same. I would try to see if you could Roth convert those funds by April 15th. If you can't, the Roth conversion will count for 2024, and wouldn't be able to be used for a backdoor Roth in 2023.
Once your in the Roth IRA
How do you specify what Roth IRA investment you want
Ie. Domestic Equity vs international
Mid-cap vs large-cap etx
You can choose your investments on the Fidelity website and trade as you would with any other financial institution?
Thank you for making this step-by-step video. It is super useful!
Of course! Glad you found it to be helpful!
@@TheCreditFrog Perhaps, you could do a video about "Mega backdoor Roth" which I hear people talking about it.
@@huy3967 Great suggestion! That technique is a little more complicated with a lot more moving parts so that is something that I need to do a lot more research on!
I prefer to make monthly contributions. Is there any difference between doing a monthly conversion from traditional IRA to Roth IRA and then invest each month, or make a single max conversion to the roth IRA at the beginning of the year, and then invest a portion each month?
Also, what do with the gained interest on the money held in the Traditional IRA before conversion? For example, lets say i contribute $500 to the traditional IRA and by the time I wait for it to clear, it earned 1$ in interest. Can I then convert $501 without taxes/penalty to Roth IRA, or only the $500 that was originally contributed?
Thank you for the video!
There's no difference except you have to do that 12 times instead of once, which can be annoying to keep track of. In terms of the gained interest, you can Roth convert it, knowing that you'll pay ordinary income tax on it, but since it's a small amount, it's usually a negligible amount anyways.
@TheCreditFrog Thank you for your reply! For case management account (originally individual account), does it matter if I do have balance in the individual account for investment? I can transfer money to individual account, then just transfer the amount that I'll use for ROTH IRA conversion, correct? also how do we know if it is clear before transfer to IRA and then conversion? Thanks!
If you have a cash management account, that would be like a regular checking account so this would not count towards any investments. So you could transfer money from your bank into a cash management account (you could also transfer money directly from your bank into a Trad IRA) and then you could do a Roth conversion. The time it takes for the money to clear is variable, but usually ranges from 2-5 business days.
Thank you for this video! You saved me a call to Fidelity :)
You're welcome Andrea! Congrats on getting that backdoor Roth in early this year!
I have a SEP IRA that I contribute 25% to yearly. Will this affect the backdoor Roth IRA you discussed? You did mention step 3 that there should not be any other contribution to other IRA.
My plan is to open a traditional IRA to go through the process you indicated. I will have $0 balance in the traditional IRA after the process. But will my already existing SEP IRA affect anything (Even though I am leaving my SEP IRA account alone)
Please let me know if possible. TY
Hi, yes the SEP IRA is going to be an issue. Do not do the backdoor Roth IRA since it will trigger tax consequences if you have an existing SEP IRA like I mentioned in the video. Please speak to a financial professional to discuss your options.
Frickin' AMAZING video. Thank you so much.
Glad you found it helpful, and you're welcome!
Great video! A couple a questions if you don’t mind? I noticed you deposited the maximum allowable contribution once during the year. Is that because you put it in a High Yield Savings account to benefit your higher dividends through the year? Also can I contribute to Traditional IRA every paycheck and as long as I transfer all the $ to Roth at the end of the year then I’ll be ok? What if I don’t maximize the contribution amount antil tax deadline in April the following year? Can I do the same with the back door? Thanks!
Thanks! Yeah, so for your first question, yes, I typically save the following years' contribution in a HYSA so it gains interest before it gets contributed the following year.
For the second question, yes you can contribute to Trad IRA and then Roth convert at the end if you want, but it's better to Roth convert when you contribute to Trad IRA because then you can invest the funds without worrying about paying taxes on any capital gains you may get throughout the year.
For the third question, you can wait until Apr 15th, the following year, but it just makes the Form 8606 reported more complicated (still doable though). My preference is to contribute and Roth convert the same year as the tax year if you can. Hope that helps!
Is the fidelity cash management account deposit step necessary to make this work? Or can I just deposit money from my bank account into the Traditional IRA then convert the funds to the Roth account?
You can just deposit money from your bank account
For higher-income earners, when transferring from traditional IRA to Roth IRA in order to do backdoor,
Is it preferred to invest in the traditional IRA BEFORE doing the conversion? Or is it okay to invest AFTER conversion when it is in the Roth IRA?
It’s preferable to invest after you Roth convert so that there aren’t any capital gains that you’d have to pay ordinary income taxes on, which would trigger when you do the Roth conversion.
Thank you so much, excellent video! One question, I called fidelity this week and they told me they don't offer mega back door IRA contributions. Is this different? Do you use another company to hold the plan to allow for this? Thanks!
Thanks! Regarding mega Backdoor Roths, this is something that will be done using your 401k provider more than it would with your Roth IRA provider. You’ll need to see if your 401k provider offers in-service distributions and some other things. These can get very technical so I recommend you do this along with a financial professional because there are a lot of moving parts, and you don’t want to miss something!
Great video! I had to recharacterize $2.5k I've deposited into my Roth IRA earlier this year as I got a promotion and am now over the cap - but my question now is, should I wait for the $2.5k to appear in my Traditional IRA, and then add the additional $4k to get me to the $6.5k cap and transfer all of it to Roth IRA at once?
Or should I handle the $2.5k conversion first, then on a clean slate deposit the $4k to traditional, then convert to Roth?
Just making sure combining the two won't affect me
Thanks Romina! Recharacterizations can be tricky since it changes the tax reporting at the end of the year, depending on if that original contribution had any capital gains or not. Also, depending on if you already have existing assets in your Traditional IRA, this can get complex very fast. I recommend you speak to a financial or tax professional to see what the best options are for you so nothing is done incorrectly!
Thanks for the video. Very helpful! For yearly contributions, do you have to open a new roth ira account in 2024 that is different than 2023? Will this require you to manage x amount of accounts?
Of course! Glad you found it helpful. For future contributions you can use the same Trad IRA/Roth IRA accounts that you already have!
Simply, you're the best
I appreciate that, thank you! Glad you found the video helpful!
Great video! Quick question. I was unemployed in 2023 yet at the same time didn't qualify to contribute to IRA due to filing taxes jointly. So I am planning to open a backdoor Roth IRA, and keep my traditional IRA $0 just as your example above. Do I need to report this somewhere when filing my tax returns? Secondly, I mistakenly filed my tax returns already (without reporting my plans of opening a backdoor Roth IRA), does this mean I can open a backdoor Roth IRA only for 2024?
You report any Roth conversions on Form 8606. If you've already filed your tax returns already, you could either amend your tax return or you can just forego the contribution in 2023 and just focus on 2024. I would also highly recommend consulting a tax professional to figure out the best strategy for your own specific situation.
Hello - great video. Btw, one of my friends did a similar process but with Schwab. However when he did the transfer to Roth, withheld 10% and allowed only the remaining 90% to transfer. Can we avoid this penalty?
You have an option to withhold with Fidelity, but you can choose not to. For this strategy, it's better if you don't do a withholding in most cases, but if there are questions, consulting a financial professional would be prudent.
I currently have a Roth IRA account that I used in 2023 but my annual income exceeds the threshold to be eligible again in 2024. Trying to set up a back door Roth IRA like you displayed in this video. However, in order to do so, do I need to open a new Roth IRA account for the transfer or can I use the same Roth IRA account I have open from 2023?
Yup, you can use the same Roth IRA for the backdoor Roth IRA method! The biggest thing is to make sure there are $0 in assets in any Trad/SEP/SIMPLE/Rollover IRAs by Dec 31st of this year if you decide to proceed to avoid any taxes on that conversion.
I accidentally transfered from my cash management account to Roth IRA instead of doing it through the Traditional IRA first. What should I do now? Are there going to be just tax implications or am I in trouble in some other way? Any help is appreciated.
You can always transfer it back out again. Contributions can be moved freely between Roth accounts, but it's the capital gains that become an issue. Having said that, I'd recommend checking with a financial professional to see what's the best thing to do. I think it's as simple as moving the contribution back out (as long as it's done quickly before it's invested), but I may be missing something.
Thanks for your feedback
I had rolled over my old employer 401k to my own rollover IRA account as I was asked to move my 401k from them. Does this make me ineligible to open traditional IRA account and do back door Roth. Thank you!!
Yes, at this point you’d have to Roth convert those funds, but that would generate a large tax bill. If you want to do a backdoor Roth IRA, I would ask a financial planner for your best options, which may include a Roth conversion ladder.
Thank you for the great video. If I already had an older IRA account setup with fund saved to the account in previous years, is it better to open a new IRA and Roth accounts prior performing the same task?
You're welcome! From my perspective, it doesn't really matter, but it certainly helps if your Roth IRA and Trad IRA are both with the same custodian. Also, it's important to make sure that your older IRA (guessing it's Trad) has $0 in it by Dec 31st if you want to do a backdoor Roth. If not, definitely consult with a financial professional to figure out the best strategy to get there while minimizing your tax burden before attempting the backdoor Roth.
This is so helpful. What happens if I already have stock investments in Traditional non deductible IRA in fidelity account? How can I roll over to Roth IRA using backdoor strategy?
If you have assets in a Trad IRA already, it would be important to Roth convert those before proceeding with a backdoor Roth IRA. If you have a lot of assets, this may generate a large taxable event so in that case, it may be helpful to talk to a financial professional to see what your options are, for example, a Roth conversion ladder.
Greta video thank you! I'm confused, is it absolutely necessary to have the funds in the cash management account before January 1 or can you do it qll in the same year?
You can do it all in the same year! You also technically don't need a CMA, and can use your existing bank if you want.
Thank you for a wonderful video, very well explained. Could you help with my question . I did a monthly contribution to my ROTH IRA but at the end of the year I found myself not qualified since my income had exceeded the ROTH limit.
I plan to recharacterize that to traditional ROTH but what would I do with my growth ?
Thanks! I recommend you speak to a CPA or tax professional to see what your options are.