Funding a Fidelity Backdoor Roth IRA – a Step by Step Guide

There have been a lot of tutorials on backdoor Roth IRA’s through Fidelity. Both Physician on Fire and White Coat Investor have one. While I have used Vanguard in the past for my backdoor Roth’s, this year I transferred my account to Fidelity to streamline my accounts.

What is  Roth IRA?

This is another way to place money in a tax-advantaged account. What do I mean by tax-advantaged? Basically money that goes into a Roth is taxed when you place the money into the account and earnings grow tax free. So when you withdraw money in 10 to 20 years, you will not pay additional taxes.

This is different than a traditional account (both IRA or 401k’s) which grow tax free until you withdraw the money. Then taxes are due on earnings.

A Roth IRA  (and a traditional IRA) are both funded with after-tax dollars. This is different than a traditional 401K which provides a reduction in your adjusted gross income. So using a IRA is only for the benefits of having your money/investment grow tax free and not for any immediate tax benefit.

Why do a backdoor Roth IRA?

The reason to do a backdoor Roth IRA (as opposed to just funding it through the front door) is because there are income limitations for contributing.

For 2018, you have to make less than $189,000 if you are married filing jointly to contribute the full $5,500. From $189,000 to $198,999 the amount begins to be phased out. Above $199,000 you have to use a backdoor conversion.

If you are single, the income limit is $120,000 to be able to contribute the full amount and it is phased out up to $134,999. Above $135,000 you have to do a backdoor conversion

If you are making less than $120,000 (single) or $189,000 (married filing jointly) then you can contribute to a Roth IRA with no use of the backdoor. If you make more, as most physicians do, then keep reading.

How to contribute to a backdoor Roth IRA through Fidelity.

First things first

The only real trick to this backdoor IRA is that you cannot have any any tax deferred IRA accounts with money in them. The balances have to be $0.00. That includes traditional IRA, SEP IRA, and Simple IRA. You can have your traditional 401(k) and 403(b) accounts still.

If you do have money in your tax deferred IRAs then you need to find somewhere to move them. You will get hit with taxes on moving or converting these monies, but it may be worth it to you. For those with no money in traditional IRA’s, it becomes less of an issue. White Coat Investor writes a good summary of how you can move funds out of prior IRAs here (check out step 1).

Now for the contributions

I opened up a traditional IRA first through Fidelity and funded it with $5,500 from my bank account. I placed that money into a money market account as a placeholder that does not earn much interest. That way when I converted it to a Roth I would not owe taxes on the interest earned.

I learned this lesson in my first year of doing this where I placed the money in a index fund and earned some profits before converting it. I was left paying the small amount of taxes on the conversion, but it was still annoying.

Step by step

First open up a traditional IRA

1) To fund with cash from your bank account. $5,500 if you want to maximize the contribution. Once the cash is available in Fidelity, use it to fund a a Money Market.

2) Next open up a Roth IRA. Leave this unfunded.

3) Now you get to wait a day or two. There is some concern for the Step Transaction Doctrine. There has been a lot written about this, though most people would argue waiting a few days is sufficient. Michael Kitces at Nerd’s Eye View also has a nice article about it. So read up but I do not worry to much about the IRS coming after me on this issue.

Another caveat is that with Fidelity it seems that you have to wait 5 business days. At least that is what I had to do. This is not the case with Vanguard where they will let you purchase shares right away.

Ready to fund the Roth IRA

4) Go to the upper left side of your screen and click on Accounts & Trade. Under that go to the “Transfer funds” tab (see below).

 

Transfer funds from the traditional to Roth IRA

5) Now you should see a screen like the one below. It is a small screen in the upper left corner of the screen. You will want to transfer from you Traditional IRA to the Roth IRA.

 

7) After you agree to transfer funds, Fidelity will tell you this is a taxable event. You will be allowed to withhold federal taxes now. However, since you will have $0 in gains, there is no need to hold taxes. You will have $0 taxes on this. Instead elect to not have federal taxes withheld.

6) The next screen asks you to verify the transfer. Easy peasy. Just click on the button in the bottom.

 

7) Once you have verified the conversion you will need to agree to transferring the entire account. I would also opt to leave the account open (the traditional IRA account) so that you can fund it in the future.

 

 

8) Finally you have to agree to the conversion. After this you will receive a confirmation screen and email. You are done. The backdoor IRA is converted.

 

Tax time- Form 8606

9) At tax time you will need to fill out a Form 8606 for the IRS. Here is the IRS instructions for filling it out. Also, check out the White Coat Investor one last time for some more info on this.

There you have it. A step by step on how to fund a Fidelity Backdoor Roth IRA.

Round up

Physician on Fire has a nice round up of other’s who have written on this topic…so here it is.

 

 

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DadsDollarsDebts

I am a Dad and Doctor trying to find financial freedom by owning my dollars and debts. Helping dads with their finances so they can focus on the family.

9 thoughts on “Funding a Fidelity Backdoor Roth IRA – a Step by Step Guide

  • February 2, 2018 at 12:01 pm
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    Thank you for posting this!

    I recently wrote an article between the differences between the Roth and Traditional IRA, and this was going to be the subject I touched next. I am not in a financial scenario yet where my income exceeds the Roth limit, but I want to prepare myself for if/when it does.

    Not a lot of people know about this backdoor conversion, and your article really helps explain it very well!

    Reply
    • February 2, 2018 at 12:28 pm
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      Thanks for checking it out and glad it was helpful. Good luck with your future savings endeavors and income growth!

      Reply
  • January 30, 2018 at 7:31 pm
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    Perfect timing. Last Friday, Mrs. G and I were listening to the Millionaire Educator on a podcast and he brought up the subject of backdoor Roth contributions. Admittedly, we had a tough time following his explanation. Thanks for clearing things up, my friend. Very informative.

    Reply
  • January 27, 2018 at 9:26 am
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    Actually the difference between a regular IRA and a Roth IRA is that the dollars put in a Roth are after-tax dollars whereas the dollars put in a regular IRA are pre-tax:

    Income after all other deductions etc: 100,000- $5000 IRA deduction= taxable income of $95,000 this year
    $5,000 in IRA grows to $20,000 in 24 years. You take it out of your IRA and it adds $20,000 to your taxable income that year, which is taxed at your marginal rate at that time.

    Income after all other deductions etc $100,000. $5,000 Roth IRA contribution does not reduce taxable income so to put $5,000 away you have to reduce your spending enough to cover the $5,000 plus the tax on it.
    $5,000 Roth IRA grows to $20,000 in 24 years. Take it out and spend it, no taxes due.
    $

    Reply
    • January 27, 2018 at 9:56 am
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      You are correct for individuals making less than $118,000 annually for singles and $189,000 if married with reductions then going to $133,000 and $199,000, respectively.

      For the high earners out there it is not a tax deduction. Instead we have to do a backdoor method, using after tax dollars on what is put in but then letting it grow tax free.

      Reply
  • January 27, 2018 at 4:28 am
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    The one tax solice employed docs get every year. Thanks for showing us the Backdoor

    Reply

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