What is a Backdoor Roth? Is a Backdoor Roth IRA right for me?
A Backdoor Roth is a solution for investors who make too much income (MAGI of $116k single or $183k married for tax year 2015) to qualify for normal Roth contributions, and want to increase their retirement savings in tax advantaged accounts.
A Backdoor Roth is done by first contributing to your IRA. You then complete a Roth conversion form to move this contribution to a Roth IRA. You will need both an IRA and a Roth account to complete this process.
We’re excited that you want to start a "backdoor Roth IRA." Please note the Backdoor Roth can be a little tricky, so be sure to read all the steps and fully understand all the tax implications.
Two very important notes about using the Backdoor Roth:
First, you cannot have an existing Traditional IRA or Rollover IRA. (If you have a small one (less than ~$20k) we can help you convert it to a Roth, but realize there will be tax implications. Since money in a Trad IRA has never been taxed, you have to pay taxes on it now when you convert to a Roth IRA.)
Second, Having a Backdoor Roth will prevent you from filing your taxes electronically, so you'll have to mail in a paper copy of your return next year. You will also have to fill out Form 8606 when filing your taxes.
If you’re concerned about the tax consequences, please contact a tax specialist to see if a Backdoor Roth is right for you.
If you’d like to proceed, please follow our instructions below:
Step 1: Open a Roth IRA at Fidelity, following the link here: https://www.fidelity.com/retirement-ira/roth-ira
Step 2: Open a Traditional IRA at Fidelity, following the link here: https://www.fidelity.com/retirement-ira/traditional-ira
Step 3: Contribute $5,500 to the new Traditional IRA. Be sure to leave the $5,500 in cash or a money market fund, do NOT invest it!
Step 4: Link Up your new Fidelity accounts to your FutureAdvisor
Then apply to FutureAdvisor Premium with your new accounts, and any other accounts you’d like to include:
Step 5: Email firstname.lastname@example.org and let us know you'd like to perform a Backdoor Roth IRA conversion by converting your Trad IRA to a Roth IRA. (This is important! If we don't know this, our system will automatically invest the $5,500 in cash in the Trad IRA.)
Step 6: FutureAdvisor will send you the documents electronically via DocuSign to link on to your new Trad IRA and Roth IRA, as well as convert the Trad IRA to a Roth IRA. You'll receive one DocuSign package containing three forms.
Now you’ll have $5,500 in your Roth IRA and we'll automatically invest it for you! You may do this every year to get $5,500 into your Roth IRA. Your spouse may do the same as well, provided you each have $5,500 in earned income.
Please read these helpful articles before beginning:
http://www.forbes.com/sites/ashleaebeling/2012/01/23/the-backdoor-r... (how to "hide" an existing Trad or Rollover IRA in a 401(k) so you can use the backdoor.)
The Backdoor Roth IRA is a little cumbersome to fund each year, but, it is worth it if you are willing to put in the time.
(If you do qualify to directly contribute to a Roth IRA, simply do that. No need to use the backdoor every year. If you are unsure of what your salary will be for the year, or may earn a bonus, we suggest waiting closer to the end of the year when you have a better idea of your YTD income. FYI, the deadline for converting a Trad IRA to a Roth IRA is Dec 31 of the current tax year. You may convert a Trad IRA to a Roth IRA at any time, but understand that it will be reported in the tax year you make the conversion. For example, Helen makes a $5,500 non-deductible Trad IRA contribution in Feb of 2015 and applies it to the 2014 tax year. (She has until April 15, 2015 to contribute and apply it to the 2014 tax year. Helen can convert this Trad IRA to a Roth IRA in Feb 2015, but that will be reported on her 2015 taxes, not her 2014 taxes. If she wants it to be reported on her 2014 taxes she must make the conversion prior to Dec 31, 2014. If you perform the Backdoor Roth conversion correctly, there will be no gains, and therefore no tax impact, when converting. Merely, it is a matter of which tax year you report the conversion in. For ease of tracking & reporting, we believe it is preferable to make the contribution and conversion in the same tax year.)
Form 8606 reference: http://www.irs.gov/uac/Form-8606,-Nondeductible-IRAs
The tax strategy discussed should not be interpreted as tax advice and it does not represent in any manner that the tax consequences detailed will be obtained or that it will result in any particular tax consequence. Clients should consult with their personal tax advisors regarding the tax consequences of investing.
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