How to do a Backdoor Roth IRA – Step-by-Step Instructions with Fidelity for 2023

In this article, we’ll walk through step-by-step how to do a Backdoor Roth IRA including screenshots. This article shows Fidelity screenshots, but the concepts are the same for any brokerage.

Summary

  • A Backdoor Roth IRA is a strategy for high income earners to subvert the Roth IRA contribution income limits
  • Prepare for your Backdoor Roth IRA by ensuring you have no money in a Traditional IRA
  • Contribute cash up to the contribution limit to an empty Traditional IRA
  • Immediately convert your entire newly funded Traditional IRA to a Roth IRA
  • Congress has attempted to close the Backdoor Roth IRA “loophole” but it remains legal in 2023

What is a Roth IRA?

If you’ve made it to this article, I’m sure you know that a Roth IRA is an investment account that can be used to grow money tax free. But it comes with some strings attached. One of those is income limits. If you make too much money, you’re not allowed to contribute new cash to a Roth IRA.

Roth IRA Income Limits for 2023

The table below shows the maximum “Modified Adjusted Gross Income” (MAGI) you can have and still be allowed to make the max contribution to your Roth IRA ($6,500 or $7,500 if you’re 50+ for 2023). Technically there is a “phase out” range above this income limit. If you’re just over you’ll be able to make a smaller contribution to your Roth IRA. However, since you generally don’t even KNOW your exact MAGI until tax time, it may make sense to just do a Backdoor Roth IRA if you’re close to this limit.

Tax Filing StatusMAGI Income Limit
Single$138,000
Married Filing Jointly$218,000
Married Filing Separately$0
2023 Max Modified Adjusted Gross Income under which you can max out a Roth IRA contribution

What is a Backdoor Roth IRA?

If you want to contribute to a Roth IRA and you earn too much money, the Backdoor Roth IRA is an option to bypass those income limits. It’s a strategy that has been confirmed legal by the IRS. The strategy works like this:

  1. Clear out any Traditional or Rollover IRA money by rolling it to your employer 401k
  2. Contribute cash (usually the $6,500 max) to your now empty Traditional IRA
  3. Convert the $6,500 in your Traditional IRA to your Roth IRA

Normally a Traditional IRA is used to make tax-deductible contributions. But high income earners (especially those with workplace retirement plans like a 401k) aren’t eligible for that tax break. However, you still are allowed to CONTRIBUTE the money as long as you indicate “0” on the IRA tax deduction line of your taxes. You’re also allowed to convert a Traditional IRA to a Roth IRA at any income level. Since that $6,500 in the Traditional IRA has already been taxed when you earned it as income (and didn’t take the tax deduction), the conversion to Roth happens tax free with all $6,500 transferring to your Roth IRA. The end result is the same as if you contributed directly to the Roth IRA.

Talk to a CPA Territory

It’s worth mentioning that if you’re in a high enough income bracket to need a Backdoor Roth IRA, you’re likely in “talk to a CPA” territory. There may be specific tax issues in your situation that impact whether a Backdoor Roth IRA makes sense for you. If they advise it’s a reasonable strategy, this guide may be a great place to walk through the details.

The Pro Rata Rule

The big caveat to the Backdoor Roth IRA strategy comes in the form of the pro rata rule. It says that when you’re converting money from a Traditional account to a Roth account, if there is both pre-tax and post-tax money in that Traditional account it must be converted proportionally.

As an example, let’s say you have $58,500 in a Rollover IRA that was rolled over from a previous employers Traditional 401k. If you do a post-tax $6,500 contribution to a Traditional IRA you’ll then have $58,500 pre-tax and $6,500 post-tax for a total of $65,000. If you convert that $6,500 in your Traditional IRA to a Roth IRA, the IRS will say, “Hey, only 10% of your IRA money is post-tax and 90% is pre-tax so when you convert this $6,500 to Roth, we’re going to tax you on 90% of it”. Getting taxed on a Traditional to Roth conversion misses the point of a Backdoor Roth IRA. You can convert a Traditional to Roth at any point (paying the tax on the entire amount) but generally high income earners want to delay that until they’re in a lower tax bracket.

But there’s a way to clear out your Traditional IRA without paying any tax which clears the path for a Backdoor Roth IRA.

Step 1: Clear out your Traditional IRA

If you don’t have money in a Traditional or Rollover IRA you can skip this step and go to step 2. For those that do, you’ll need to clear out that money to avoid the pro rata rule.

The pro rata rule applies to individual accounts, SEP IRAs, and SIMPLE IRAs, but not workplace retirement plans (like a 401k or 403b). The strategy here is to roll over all the money in your Traditional and Rollover IRA to a workplace 401k leaving your individual IRAs empty. If you have a lot of money in a Traditional IRA and don’t have a workplace retirement plan, or it’s distasteful due to high fees or poor investment options, your Backdoor IRA journey may end here. That’s ok, you