A guide on how to do backdoor Roth IRA

Are you wondering if you can do backdoor Roth IRA every year? With this article, you’ll receive the right answer. It will also offer a step-by-step guide on how to convert from IRA to Roth IRA.

Backdoor Roth IRA is an ideal strategy of converting to Roth IRA from your traditional IRA. The question goes, do you have to do Backdoor Roth IRA every year?

The first thing you should know is that the one-year rule doesn’t apply. In fact, any additional conversion you do requires no waiting period.

What does that mean? It means that you can convert any amount you wish, at any time from your traditional IRA to a Roth IRA. Isn’t that amazing?

Probably you may be asking about the annual rollover rule. Yes, it’s there. But it only applies to the traditional IRA money rollovers when a check is presented to the taxpayer, and he or she deposits the money into another traditional account before 60 days are over.

However, before thinking of walking through the “backdoor”(by moving from traditional IRA to Roth IRA), you should ensure that you are in the right income bracket. These limits keep on changing, that’s why you should keep updated by visiting the IRS contribution limits page.

Backdoor Roth helps you to avoid the harsh income restrictions and then contribute to your retirement basket, but only if you receive at least $135,000 per year.

If your traditional IRA account has at least $6,000, you can freely roll over more money than the yearly contribution.

How to do a Backdoor Roth IRA

A 4-step guide on how to do a backdoor Roth IRA
A step-by-step guide on how to do backdoor Roth IRA in 4 easy steps

This process includes only four main steps.

1.   Open a Traditional IRA account

Do you have an IRA account? If no, you should start by opening one. The simplest way, which eliminates volatility, is to credit your cash sweep fund. Confirm if you’ve made a successful transaction and then request for a Roth IRA conversion.

If your account’s status becomes active, you can credit your account with an annual contribution based on your limit. If you are less than 50 years, you’re allowed to contribute $6,000, whereas if you are above 50 years, you shouldcontribute $7,000.

If you are married, each of you can contribute to the age-appropriate limit.

When you make Traditional IRA contributions, they are tax-deferred by default. Again, there exists another set of income phase-outs included in the Traditional IRA deductions. However, these deductions don’t apply to Backdoor Roth IRA.

Feel free to read What’s An IRA Account?

2.   Open a Roth IRA account

If you are yet to open a Roth account, you should ensure you open a standard one.

But before opening this account, determine if you are eligible for it by using one of the online modified adjusted gross income calculators. See if you qualify the income limit stated by the IRS.

Keep in mind that married and single contribute differently. If you are single, you can only contribute if your annual income lies between $116,000 and $131,000. On the other hand, married should be receiving an income between $183,000 and $193,000 annually.

Second, choose the best type(s) of investment(s) to venture in.That calls you to do thorough research since a wrong decision can mess you badly.

Lastly, research thoroughly on the financial institution or brokerage that will best suit you.If you are starting, you may consider Roth IRAs.com’s Account broker list and compare them to choose the best. You can also opt for local banks and investment firms.

What you should compare:

  • Account fees charged
  • The minimuminitial contribution you should pay
  • Account funding options offered
  • Tools and information provided
  • Investment choices provided
  • Where they are located

After arriving at your best decision, apply for a new account. Most brokers allow new clients to apply online. And if you’ve chosen a local broker with a physical office somewhere, you can book an appointment if you wish to open it in person. To apply online, visit the broker’s website and follow the instructions provided, entering all the information required.

3.   Transferring Money to Your Roth IRA

Backdoor Roth IRA enables you to convert money at any time that's convenient for you
Backdoor Roth IRA enables you to convert money anywhere anytime you want

Roll-over Your Money into Roth IRA

First of all, request your broker or institution to withdraw funds directly from your Traditional IRA. Ensure you avail the check and then deposit the amount into your Roth IRA Account within 60 days. If you fail to deposit within the 60 days, you risk paying tax and then encounter a penalty of 10% of your hard-earned money.You can transfer either all or part of your amount in the Traditional IRA to your Roth IRA.

Perform a Trustee-to-Trustee transfer

Making this transfer ensures you are not taxed on the transferred amount. How do you do that? Open your Roth IRA account and then request your trustee to transfer the amount you wish to your new Roth IRA account. Taking the money away from your hands ensures you don’t face the penalty.

4.   Pay Income Taxes When you are Contributing Your Amount

Ensure that you file returns for funds converted from both deductible and non-deductible sources before the deadline hits.

You may also be interested in reading How to Pick the Best State to Retire Based On Your Income

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