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
There you have it. A step by step on how to fund a Fidelity Backdoor Roth IRA.
Physician on Fire has a nice round up of other’s who have written on this topic…so here it is.
- Physician on Fire : Vanguard Backdoor Roth 2018: a Step by Step guide
- The Finance Buff: Backdoor Roth: A Complete How-To
- White Coat Investor: Backdoor Roth IRA Tutorial
- Michael Kitces: How To Do a Backdoor Roth IRA (Safely) and Avoid the IRA Aggregation Rule and Step Transaction Doctrine
- Vanguard: The benefits of a “backdoor” Roth
- Morningstar: Backdoor Roth IRA? Avoid These 6 Mistakes