backdoor roth ira
Vanguard is the company I use, and it’s one that tends to be favored among many index fund investors, so that’s what you’ll see here. The process should be similar with other brokerages.
Money contributed to Roth accounts does not result in a tax deduction, unlike contributions to tax-deferred accounts. Both Roth and tax-deferred accounts benefit from tax-free growth, unlike a taxable account that is subject to tax drag (which can be minimized).
You cannot have tax-deferred money in a traditional IRA, SEP IRA, or SIMPLE IRA in your name.
If you haven’t done so already, you’ll need to open a Traditional IRA. I won’t walk through all the steps, but it should be straightforward.
Brokerage Account Backdoor Roth Step 1: Make a Non-Deductible IRA Contribution
- After logging in, I point to My Accounts -> Balance & holdings - Find your Traditional IRA brokerage account, and click the arrow to the right of “Buy and Sell,” and select “Contribute to IRA.”
- Vanguard asks if it’s a rollover from another tax-deferred account. It’s not. Select “no” in the new blue color. - Towards the bottom, you’ll choose the YEAR for which you want this contribution to count. - Tell Vanguard where this money is coming from, continue, and you’ll be asked to review and submit.
Brokerage Account Backdoor Roth Step 2: Convert to Roth IRA
- I click “Convert to Roth IRA,” - Scrolling down the page, we choose to “Convert all of the account.” - Confidently select the checkbox that states you will not elect to withhold federal and state income taxes.
- Look it over and submit your Roth conversion. - In the next step, we’ll invest that money. If for some odd reason, you plan to leave the money in a money market fund, you can be done.
Brokerage Account Backdoor Roth Step 3: Invest in the Roth IRA
- Click on “Buy and Sell” and then “Buy Vanguard funds.” - I choose my REIT index fund on the left with my settlement fund (money market) being used to fund the purchase. -It says “Review and submit.” You know what to do.
If you’re married, your spouse can also do the backdoor Roth, even if he or she has no earned income.