If you earn too much to contribute directly to a Roth IRA, the wealthy found a completely legal way around that. It is called the backdoor Roth IRA. And today Stephanie Dorsey walks you through every single step.
This is Episode 19 of What the Wealthy Do, part of the How Does This Actually Work series breaking down the exact mechanics of wealth building strategies so you can actually execute them.
A backdoor Roth IRA works because Congress removed the income limits on Roth conversions in 2010 while keeping the limits on direct contributions. That created a loophole: contribute to a traditional IRA, immediately convert it to a Roth IRA, and pay zero taxes if you do it right. The IRS knows about it. It is completely legal.
This episode covers every step from opening your accounts to contributing, converting within one to two days, investing the cash in your Roth, and filing Form 8606 with your taxes. Stephanie also breaks down the pro rata rule, the number one thing that trips people up, and exactly how to deal with old traditional IRA money before you do your first backdoor conversion.
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BACKDOOR ROTH IRA QUICK START CHECKLIST
Step 1: Open accounts if you do not have them- Open a traditional IRA- Open a Roth IRA- Use the same brokerage (Fidelity, Vanguard, or Schwab)
Step 2: Clear out any existing traditional IRAs- Roll old traditional IRAs into your 401k to avoid the pro-rata rule
Step 3: Contribute to your traditional IRA- Transfer $7,000 (or $8,000 if 50 or older) to your traditional IRA- Keep it in cash, do not invest it yet
Step 4: Convert to Roth IRA (1 to 2 days later)- Log into your brokerage- Convert the entire traditional IRA balance to your Roth IRA
Step 5: Invest your Roth IRA- Buy index funds or target date funds
Step 6: File Form 8606 with your taxes- Use tax software or work with a CPA
Step 7: Repeat every January
This podcast provides financial education and not financial advice.
