August 1, 2019

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

Written By Mary Beth Eastman
Last updated August 1, 2019

Note: We receive a commission for purchases made through the links on this site. Our sponsors, however, do not influence our editorial content in any way.

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.

  • No comments yet. Be the first to get the conversation started. Here's some food for thought:

    Do you have any thoughts?

Submit a Comment

Your email address will not be published. Required fields are marked *

Advertising Disclosure

Advertising Disclaimer: Simple. Thrifty. Living. does receive compensation for some of the services that we recommend, although we only recommend services that we truly believe are the best.