This post was written based on the limits for 2023. The maximum contribution, MAGI, etc. may change year-to-year.
At the time of updating this post for 2023, a Roth individual retirement account (IRA) is a special retirement account that one can contribute up to $6,500 (or $7,500 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 years of age, 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 2023, if you are single with a MAGI > $153,000, 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 $6,500 to my traditional IRA from my checking account. It takes 1-3 business days for the funds to settle. I contribute to the same year as the calendar year to make the tax forms easier.
After confirming the funds have indeed settled, I’ll click on “Transfer” at the top of the Fidelity page and begin rolling over the Traditional IRA funds 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 funds for the Roth conversion. Keep in mind this is a 2023 contribution (contribute and convert the same calendar year as the taxes) for the 2023 tax filing I’ll do by April 15, 2024.
Once the funds have settled in the Roth IRA, I’ll typically invest them in a low expense ratio total market index fund.
To formalize the backdoor Roth contribution for tax purposes, I complete form 8606 for nondeductible IRAs. Here’s an example of my 2021 tax form when the Roth limit was $6,000.
I could theoretically do my Roth contribution anywhere from January 1 till April 15 of the following year 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 2022 taxes by going through the aforementioned process in January 2023, my 8606 tax form becomes a little more complicated. Instead, I complete the contribution AND conversion 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!
Thank you for this post! I have been doing Backdoor IRAs, but never heard of form 8606. Do you fill it out and then file it the following year when you do your taxes?? What happens to people like me who never filled one out before?
Form 8606 is used to report the nondeductible contribution to the traditional IRA and the subsequent conversion to a Roth IRA. It is important to accurately complete and file Form 8606, as it is used to track the tax basis of the individual’s traditional IRAs and ensure that they do not pay taxes on previously taxed money when they take distributions from their IRAs. If you haven’t done them, I’d check in with your CPA or retirement firm sooner than later.
I’m confused, why not just contribute straight to the Roth IRA instead of going to traditional?
Also, can you contribute the maximum contribution even when you have an employer based retirement fund that contribute per pay period?
A backdoor Roth IRA is a way for individuals to contribute to a Roth IRA even if their MAGI is above the limits that normally allow them to do so. For 2023, if a single filer’s MAGI > $153,000. As far as the employer, it depends on what kind of retirement account(s) they use. Definitely something worth discussing with someone at wherever your retirement is housed (Fidelity, Vanguard, etc.)
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! 🙂
Rishi, I have two questions for you:
1. Do you contribute to your Roth account in full right away, or do you make small, regular contributions throughout the year?
2. What made you choose FNILX over other mutual funds? I’m leaning toward FZROX after reading this thread https://usefidelity.com/t/fnilx-vs-fzrox-which-is-the-better-zero-fee-fund/147 because I want to diversify my portfolio without having too many different holdings.
TIA!
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.