Backdoor Roth Ira (How To Do It In 3 Steps)

what is up everyone I'm rose and welcome back to my channel the number one place for financial education empowerment and inspiration as of 2019 Roth IRA contribution limits start getting phased out when you make more than one hundred twenty two thousand dollars if you're single or one hundred ninety three thousand if you're married filing jointly boohoo I know first role problems but just because you make a lot of money doesn't mean you enjoy paying taxes any more than the next person luckily there is a workaround and it's called the backdoor Roth IRA the backdoor Roth IRA is a hundred percent legal and it takes advantage of a little-known tax loophole it doesn't matter how much money you make anyone at any income level can qualify in this video I'll explain how the backdoor Roth IRA works and why it's legal then I'll show you how to do it step-by-step on my screen using my fidelity brokerage account and finally I'll talk about some of the common pitfalls that a lot of people miss when doing a backdoor Roth IRA if this sounds good to you give this video a like and with that we're gonna jump right in so let's talk about how the backdoor Roth works and why it's legal although high income earners can't directly contribute to a Roth the IRS has a quirky exception in the tax law that allows high income earners to indirectly contribute to their Roth IRA in other words high income earners what they can do is contribute to a traditional IRA which has no income limits and then convert that traditional IRA into a Roth IRA this is perfectly legal because while Roth IRA contributions are subject to income limits Roth IRA conversions are not it's a weird little quirk in the tax law and many high income earners take advantage of this loophole every single year so here's how to do a backdoor Roth IRA step-by-step okay the first step is to open your traditional IRA and also open your Roth IRA need to open two accounts assuming this is the very first time you've done it you don't have either so the tradition IRA is where you first make your tax-deductible contribution and you're also going to need a Roth IRA in order to do the conversion basically you need an Origin account and you need a destination account so you need both before you really do anything so first let's open the traditional IRA for that you just follow the basic account opening procedures enter name and email pretty vanilla stuff they're gonna ask you to confirm your address social security number things like that and they are gonna ask you this might be a little unfamiliar to you what you want your core position to be and the core position is basically what they what you want your cash to be sitting in if it's not invested in stocks and bonds and honestly this part doesn't really matter I would just pick the FDIC insured option because it's FDIC insured which is nice and it really doesn't matter because we're not trying to make the highest return on our money right now so it doesn't matter which position you pick you're gonna do the contribution and the conversion back to back and they'll actually like complicate things if you have earnings because then you have to report some extra things on your tax forms so just don't get stuck on this step just open the account and and once you have your traditional IRA open then you just repeat the exact same process for the Roth IRA so after you've done that I will see you when you're ready to do the contribution and the conversion okay so once you create the accounts and you log in you will be taken to this home page and to do the conversion we first need to deposit money into your traditional IRA and then the second step would be to then convert that money into the Roth IRA so there's two steps here for the first step we're going to click transfer and this little trade window pops up and I'm assuming you would have connected your checking accounts and external who counts right now I am NOT gonna go over that in this tutorial but you basically transfer from you select the account you're transferring from so in my case it would have been my personal checking account and then you transfer to obviously our traditional IRA which is going to be the originating account for the backdoor Roth conversion and the amount you would probably want to max it out for 2019 it's gonna be the limit is the annual limit is $6,000 so if you can do the max and then you click continue and then you just review and submit the transfer and the funds should be in your account within says here about four business days I've seen it done sooner but basically you'll want to set a reminder in your calendar and make sure you remember to do the conversion once it lands in your fidelity traditional IRA so after you do that let's just fast forward four days later and do the second step of the Roth conversion there are two ways you can do the Roth backdoor conversion the first way is DIY where you go to the transfer window and you literally just do a transfer from your traditional IRA to your Roth IRA and that will essentially be back to our Roth conversion um another way you can do it is you can literally just call up the fidelity and have them walk you through it over the phone this might be better for you if it's your very very first time doing it that way you make sure that there's absolutely no mistakes just because you know the potential penalties and costs of making a mistake is so high and fidelity offers free 24/7 customer service or they're very happy to walk you through it so that is really the route that I recommend but if you want to do it yourself or you you know you feel pretty confident and well-versed in this stuff you could just open the same transfer window as before and you would literally just put the traditional IRA here in the transfer from box and select the Roth IRA in other words the destination account in the transfer to drop down menu and just click continue and confirm the transfer so that would in effect do the Roth factor conversion for you as well all right so that's basically how you do a backdoor Roth conversion on fidelity and of course it will look very similar at any other brokerage platform and again you can always call customer service and just have them walk you through it step by step – so that's really it the actual process is quite simple especially if you use a platform like fidelity or even Vanguard they make it really easy and now for some common pitfalls to look out for when you do your own backdoor Roth IRA the first pitfall to look out for is not remembering the pro rata rule the pro rata rule basically says that you can't do a backdoor Ross if you have any money sitting in a traditional IRA a rollover IRA a simple IRA or a SEP IRA otherwise you would trigger a pro rata calculation that incurs taxes and basically cancels out all the benefits of a backdoor Roth IRA it's kind of complicated and to be honest I don't really understand it myself but basically make sure yo