Fidelity is a great place to invest your backdoor Roth IRA funds because they offer a large selection of low-cost mutual and index fund options. They also offer free trading of their own fund portfolios.
When doing a backdoor Roth IRA, it is important to do the conversion in the same year that you made your contribution. This will avoid a lot of confusion.
What is a backdoor Roth IRA?
A backdoor Roth IRA is an account structure that allows high-income individuals to fund a Roth IRA without directly contributing cash. The strategy is particularly useful to people who have access to a workplace retirement plan that makes them ineligible for deductible contributions in the first place.
But a backdoor Roth conversion can be tricky, especially if you have other existing IRA accounts that contain non-deductible contributions or rollovers from employer retirement plans. That’s because the IRS’ aggregation rule and pro-rata rule can collide with one another when you convert money from a traditional IRA.
To avoid getting hit with a tax bill, it’s best to wait five years to withdraw your newly-converted funds. That’s because any distributions made in the first five years of a Roth IRA are subject to a 10% penalty. It’s also a good idea to sit down with a tax professional to make sure you don’t owe any state or federal income taxes on your conversion amounts.
How do I do a backdoor Roth IRA?
A backdoor Roth IRA is a great way for people who earn too much to contribute to a Roth IRA to save tax-free. It’s particularly appealing to people with high modified adjusted gross incomes who cannot contribute directly to a Roth because of the contribution limits.
If you don’t know if it’s right for you, it’s a good idea to talk with a tax professional. They can help you determine whether a backdoor Roth IRA is a good choice for you and how to execute it correctly.
In addition to the contribution rules, there are also other rules that affect how a backdoor Roth IRA works. For example, the five-year rule requires you to wait at least five years before you can withdraw your earnings or converted IRA funds without owing taxes or penalties.
What are the pros and cons of a backdoor Roth IRA?
Backdoor Roth IRAs are a way to take advantage of the tax benefits of a Roth IRA even if you earn too much money to invest in one the conventional way. But if you’re considering this strategy, you should understand some of the pros and cons first.
The most obvious benefit of a backdoor Roth IRA is that it can help you lower your taxes in retirement. This is because Roth IRA contributions are pre-tax and you pay no tax on withdrawals in retirement.
However, converting to a Roth IRA may push you into a higher income tax bracket, so you should consider whether this will be beneficial to you in the long run. Ultimately, the best decision is to work with a financial professional who can help you make an informed decision about this strategy.
Another potential drawback of a backdoor Roth IRA is the IRS pro rata rule, which requires conversions to be proportional to how much money you hold in your traditional IRAs. This means that if you have both pre-tax and after-tax funds in your account, you’ll only be able to convert the portion of your IRA that’s been taxed.
How can I do a backdoor Roth IRA at Fidelity?
A backdoor Roth IRA is an option for high earners who don’t qualify to contribute under current Roth IRA rules. This strategy can be especially useful for investors who max out their 401(k) or other workplace retirement plans but still have excess cash that they don’t want to invest in a traditional IRA.
A backdoor conversion can work well for a number of reasons, including the ability to grow tax-free money in a way that’s difficult to do with other retirement accounts. However, there are some risks involved, and it’s best to consult a tax professional before you begin the process.
One key thing to watch out for is the IRS’ pro-rata rule, which says that once you transfer pre-tax IRA dollars to a Roth, they are all subject to taxes on a prorated basis. This can result in a very big tax bill, so it’s important to take this into account when deciding whether or not to do a backdoor Roth IRA conversion.