The Optometrist's Guide to Roth IRA and How to do a Backdoor Roth
Chapter 2B: How to do a Backdoor Roth with Fidelity | Step by Step Instructions
Update for 2023 Tax Laws:
In this chapter, we will show you a step-by-step guide (with screenshots) on how to do a Backdoor Roth for new investors. We will be using Fidelity as an example, but other major brokerages will have similar steps.
Before we get started, here are 4 requirements before attempting to do a backdoor Roth IRA:
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(1) You CANNOT have any tax-deferred money in any existing IRAs such as a traditional, SEP or SIMPLE
If you do, you need a strategy to move that money to a Roth-IRA (W2) or solo 401K (1099/S-Corp) via IRA rollover and be aware that there might be a tax bill due on the conversion.
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(2) Set up 2 Separate Accounts: Trad-IRA | Roth IRA
We will use the same two accounts to do the backdoor Roth conversion each year. So keep both accounts open!
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(3) Have the full amount $6,000 (for 2022 Limit) to fund for the 2021 Contribution first
We recommend doing the full $6,000 in one step for the previous year first (2022) if you haven't done so. Then If you have another $6,500 to contribute, then you can make a 2023 contribution as well, but again you have until 4/15/2024 the following year to do so for 2023 contribution.
Note: You can do $541 each month into a trad-IRA ($6,500 total) and select the standard "money market" fund BUT DO NOT INVEST ANYTHING until it is fully converted into the backdoor Roth IRA. You might get a few $1-2 in gains but IRS will round down to $6,500 end of the year.
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(4) Repeat for your spouse (if applicable)
You can contribute another $6,500 for your non-working spouse via Backdoor Roth IRA as well.
Step 1: Open up an account with Fidelity
If you are new to Fidelity, it is pretty straight forward, so we won’t go through all the steps. Again, make sure you open BOTH Trad-IRA and Roth IRA accounts.
Step 2: Contribute $6,000 to your Traditional IRA First
Once you open both your Trad + Roth IRA accounts, go into your Trad IRA FIRST, you should automatically have a Fidelity Federal Money Market Fund (Settlement Fund). This is basically cash, and where we can use to hold any money for transactions.
Then click Contribute to the Trad-IRA account for 2023
Next, select where the Money is COMING FROM? In this case, we are going to transfer it from a personal checking account at First Republic Bank. You can transfer it from other Fidelity accounts as well.
Then tell Fidelity where your money is GOING TO for your 2023Contribution (this amount would be $6,500), and it will automatically be placed in your Federal Money Market.
Finally, you will click Accept and get a Confirmation Statement
Step 3: Wait 3-7 days before making the Roth Conversion
It usually takes a day or two for the $6,500 to transfer from your Checking account to your Fidelity Trad-IRA. It might take up to 6 days for your money to settle in your Trad IRA
Then wait another 3-7 days before making the conversation to Roth IRA. Why?
- Step Transaction Doctrine: Some people believe that it is best to wait to do nothing from 1-7 days, this will allow the IRS to “bless” the backdoor Roth convert.
- But In 2018, Congress officially blessed the step of the Backdoor Roth IRA under current law, so many people convert it the next day without any IRS red flags popping up.
Step 4: Convert your $6,500 to a Roth IRA via Backdoor
- (1) Once your $6,500 Settles in your Trad-IRA (usually takes 2-6 days)
- (2) Go to the top Menu "TRANSFER"
- (3) Within your Trad-IRA account, select "Transfer to Roth IRA", once your $6,500 has settled in your available balance
- (4) Tax Withholding Information : Select "I understand that I'll likely have to pay taxes later"
- You will be given some information that the conversion is a taxable event that cannot be reversed. Well this isn’t exactly correct, because the final net contribution is a non-deductible $6,500 contribution.
- For 2020, there is a new tax reform that eliminates the ability to re-characterize (or undo) Roth Conversions.
Part 1: Choose the account (Trad IRA) to convert. Make sure you TRANSFER "Convert" ALL of the account
- Leave this Trad-IRA account open so we can use it for next year, then hit CONTINUE
Part 2 | Review and Submit
Step 5: Select your investment funds within your Roth IRA
Remember to buy your funds once you have the $6,500 in the money market. BUY YOUR INVESTMENT FUNDS. Think of your Roth IRA as an additional retirement accounts, so choose your investments accordingly.
Financial Reminder
"Please remember that once you convert money market fund (basically cash) from your Trad IRA to Roth IRA, you actually have to chose + BUY the Index Funds ETF like a Vanguard Total Stock Index (VTI) for it to grow within your Fidelity Brokerage account. It is surprisingly too commonplace to see many optometrists who are shocked why their Roth IRA return 0% for the last 5 years because they forgot to select the investments"
Step 6: Repeat for your Spouse (if applicable)
If you are married and file jointly, then your spouse can also do a backdoor Roth for an additional $6,500 even if he or she doesn't have an earned income for 2023
Step 7: Fill out Form 86060 in your 1050 during your tax season
Here is what your IRS form 8606 should look like, but if you want additional instructions from IRS, find out more here.
TurboTax user: Check out the Finance Buff’s Direction on TurboTax, along with H&R Block and Taxact program or Check out Youtube Step-by-step direction
Step 8: Repeat every year before April 15 (Tax Deadline)
I usually like to do my Roth IRA backdoor every year around January 2023. I do the full $6,500 amount on the same month of every year. Remember this will go into your Money Market Fund, so you will have plenty of time to choose your investments. If you forgot to do it for 2022, you have until 4/15/2023 to convert $6,000 for 2022
I recommend selecting your investment funds as soon as possible, so your money can start working sooner.
