Backdoor Roth? What That Is and How to Do It Online Today

Written By Mary Beth Eastman
Last updated January 28, 2021

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August 1, 2019

Simple. Thrifty. Living.

The government restricts Roth IRAs to individuals who earn less than $137,001 and couples that earn less than a combined $203,001. If you make more than that, then you can’t invest in a Roth IRA.

Well, that’s not entirely true. Some creative wealth managers have found a way for people earning high incomes to invest in backdoor Roth IRAs.

Many people like putting their money into Roth IRA accounts because they can avoid taxes. When you contribute to a Roth IRA, you pay taxes on the money that you put into the account. As long as you follow a few rules, you can withdraw from the account without paying additional taxes.

The option to avoid taxes upon withdrawal helps investors save money, especially when their contributions grow significantly.

Assuming that you make too much money to contribute to a Roth IRA, you will have to take a few extra steps to start your backdoor Roth online.

Invest in a Traditional IRA

First, you need to invest money in a traditional IRA. If you don’t already have an IRA, you can open one through online investing sites like:

Transfer Money From the IRA to a Roth IRA

Once you have money in your traditional IRA, you can withdraw an amount that you choose and place it in a Roth IRA. Doing so requires some paperwork, but your online IRA brokerage can give you the right forms.

If you don’t have a Roth IRA, you need to open one. Many people find it easier to open a Roth IRA through the same brokerage that manages their traditional IRA. It’s also simple and convenient to open a Roth IRA online.

Pay Taxes on Your Traditional IRA Contribution

Typically, you don’t pay taxes on the money that you contribute to a traditional IRA. Instead, you pay the government when you withdraw money.

Since you need to transfer money from your traditional IRA to your backdoor Roth, you can expect to pay some taxes on your contributions.

Pay Taxes on Your Traditional IRA Gains

If money has been sitting in your traditional IRA for several years, then you will probably have to pay taxes on your gains. You don’t owe this money until you file your taxes. Still, you should prepare. Otherwise, you might get hit with an unexpected bill.

You need to follow a few rules to stay within the law when you start a backdoor Roth. For instance, you need to put money in your Roth IRA within 60 days of deducting cash from your traditional IRA.

Your backdoor Roth IRA manager should know how to help you stay legal while opening and funding a Roth IRA. Pay attention so the IRS doesn’t charge you additional fees.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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