Fidelity Backdoor Roth IRA

At the time of this writing, a Roth individual retirement account (IRA) is a special retirement account that one can contribute up to $6,000 (or $7,000 if > 50 years old) per year. These funds are “post-tax” (money you have already paid taxes on) and can be invested in many financial assets (e.g., large capital index funds). After age 59 1/2, one can make withdrawals from their Roth IRA without paying tax on the capital gains.

There are limits on Roth IRA contributions based on one’s modified adjusted gross income (MAGI). In 2021, if you are single with a MAGI > $140,000, you cannot contribute anything to a Roth IRA… in the traditional way. Enter the backdoor contribution.

Within Fidelity, I have two accounts: a traditional IRA and a Roth IRA. Each January, I transfer $6,000 to my traditional IRA from my checking account. It takes a day or two for the funds to settle.

Transferred funds are settled.

After confirming the funds have indeed settled, I’ll click on “Transfer” at the top of the Fidelity page and begin rolling over the $6,000 into my existing Roth IRA as a Roth conversion.

I roll the entire traditional IRA into the Roth IRA such that the remaining balance is $0 each year (to avoid accruing interest). In other words, my traditional IRA has $0 for the entire year except for the 1-2 business days it’s holding $6,000 for the Roth conversion. Keep in mind this is a 2022 contribution (contribute and convert the same calendar year as the taxes) for the 2022 tax filing I’ll do by April 15, 2023.

Once the funds have settled in the Roth IRA, I’ll invest it in Fidelity ZEROSM Large Cap Index Fund, Tesla, Apple, or whatever other companies I’m interested in at the time.

To formalize the backdoor Roth contribution for tax purposes, I complete form 8606 for nondeductible IRAs. Here’s my 2021 paperwork for last year’s backdoor contribution.

I could theoretically do my Roth contribution anywhere from January 1, 2021 till April 15, 2022 when tax returns are typically due. However, it’s easier to do the contribution and conversion in the same calendar year as the taxes. In other words, if I try to contribute to my 2021 taxes by going through the aforementioned process in January 2022, my 8606 tax form becomes a little more complicated. I complete the process in January as part of my yearly tasks – membership/subscription renewals, looking for competitive rates on utilities, rebalancing my portfolio, etc.

Drop me a comment below with your questions and experiences regarding Roth IRAs!

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4 COMMENTS

  1. Came to your site to find/print the MCS chart, but stumbled upon this unusual/useful post. I had heard about the backdoor Roth IRA after doing research out of necessity. I too contribute $6000 every January to my traditional IRA, but didn’t anticipate making well over the 2021 contribution limit. Whoops. That said, I had to figure out what to do with the $6000 I over contributed. As an RN in the era of Covid, I worked an average of 5 days per week. Thanks simplifying the backdoor Roth IRA process. Works not slowing down and I’ll need it again.

    Side note: We’re neighbors. I’m in the CV Recovery Unit down the street at BSLMC. Your posts are awesome and so relevant for the work I do. Thanks for dedicating time and attention to them!

    • I’m glad you found the post useful, Dawn, and thank you for the kind words! I spent a lot of time in CV Recovery as well as the 8 floor Cooley units when I was a resident! 🙂

    • 1.) Entire contribution in one shot
      2.) FNILX and FZROX have a lot in common and will likely provide similar returns. I think about FZROX as FNILX + 10-15% of small/mid-cap securities. I invest in other funds to cover these categories.

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