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How to Do a Backdoor Roth IRA (3 EASY STEPS) - YouTube
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in this video i will show you how to do
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a backdoor roth ira in three
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simple steps
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now remember roth iras are a great way
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to grow our money tax-free
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now however once you reach a certain
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amount of income
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you might no longer be eligible to
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contribute to a roth
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luckily there is a tax loophole that was
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created in 2010
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that you can take advantage of and you
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can brag about during your next zoom
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happy hour
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so here we go step number one contribute
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to a traditional ira
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pretty straightforward you can do this
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in any brokerage firm
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vanguard fidelity doesn't matter you can
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make the maximum
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contribution for the year if you'd like
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you can go ahead and invest that
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contribution
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in a mutual fund or etf very
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important you do not want to deduct this
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contribution
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from your tax return because if you're
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no longer eligible for a roth
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then most likely you are also not
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eligible
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for a traditional ira deduction so
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that's why they call this a
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non-deductible
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traditional ira so now that you have
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this we can proceed to step two
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and this is extremely important if you
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want to avoid a huge tax bill
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a lot of people forget this step so step
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two
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is move all your pre-tax iras
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to your current 401k so
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if you have a rollover ira that came
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from an old 401k
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if you have a sep ira you want to move
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those iras to your current 401k
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now you might be asking what has that
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got to do with the backdoor roth ira
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it's because of the irs aggregation rule
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let me explain
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so let's say you have 95 000 in a
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rollover ira
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congratulations for saving that much
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from your previous job
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and now you just contributed five
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thousand dollars in
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your new non-deductible traditional ira
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so now you have a total of a hundred
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thousand dollars in ira money
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five percent of which represents your
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non-deductible
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ira five thousand divided by total
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hundred thousand
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now if you do a roth conversion of that
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five thousand dollars you converted it
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to a roth ira
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the irs will treat it as if
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you just converted part
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of your rollover ira so in this example
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you just
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converted five percent of your total ira
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money
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which for you is your non-deductible
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traditional ira but
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the irs will treat it as if you just
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converted
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five percent of your pre-tax rollover
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ira money
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which is then gonna generate a tax bill
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and you don't want to do that so make
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sure you move all your pre-tax iras
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rollovers separate arrays into your
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current 401k
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you'll need to call up your 401k vendor
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for paperwork
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this is going to be a tedious process
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they're not gonna make it easy for you
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but
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i'm confident that you can do this step
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three is you go ahead and convert your
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traditional ira
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into a roth ira now again before you
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make this step
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very important now very important
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you want to wait one year or 12 months
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before doing this rust conversion
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because the us tax court follows a thing
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called
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step transaction doctrine which sounds
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really boring i'm already falling asleep
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but
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essentially this doctrine says
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that if you do all of these steps by
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contributing to a roth ira
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and then you converted it to a roth the
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next day
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then they will see it as one single
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transaction
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which in this case you contributing to
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roth ira
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when you are no longer allowed to and
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they will slap
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a penalty on this transaction and you
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don't want to do that
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so now this is not a hard and fast rule
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some advisors
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think that waiting one month is
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sufficient so this is going to be really
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up to you
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now in this process of converting to
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roth ira
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in some brokerage firms say it's really
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simple in vanguard for example there is
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a button
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that says convert your roth ira so you
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just click on that and follow the
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instructions
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in fidelity it's not as straightforward
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as you might hope it would be
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i typically have to type in something at
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the search bar at the very top i type in
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roth ira conversion checklist
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click on the first result that comes up
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then i look for something called convert
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your ira online
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and it's going to instruct you to create
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a roth ira and follow the next steps
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now when asked about tax withholding i
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typically choose
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to not withhold taxes so i can have more
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money
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going into my roth ira and lo and behold
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you now have a
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roth ira now hopefully you've invested
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it correctly so it can grow
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in a tax-free manner and you just simply
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repeat
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these three steps each year one bonus
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tip for you all
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you might be tempted to brag about
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creating a backdoor roth ira with
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your cpa or your parents or your friends
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you do not want to mention the word
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backdoor roth ira in
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your email or in your text messages
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because again
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of the step transaction doctrine again
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i'm falling asleep
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mentioning that term so if you want to
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make sure you're doing this correctly
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we'll be happy to help you
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you can schedule a free discovery call
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with any member of our team i will
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include
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a link of that in the description of
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this video
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till next time
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you
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