By T.J. Porter, WCI Contributor
A Backdoor Roth IRA is a great way to contribute to your Roth IRA even if you exceed the account’s income maximums. However, each broker makes the process slightly different. We've already written about how Vanguard account holders can contribute to their Backdoor Roth IRAs, and we've discussed how to do it with your Fidelity account, as well. But what about using a Backdoor Roth IRA if you deal with Schwab?
Today, you'll learn how. To get started, you’ll need to make sure you have both a traditional and a Roth IRA at Schwab. If you don't already have those accounts, that should only take a few minutes to accomplish. Then you’re ready to get started with the Backdoor Roth IRA process.
First, though, let's review what a Backdoor Roth IRA is and why you might need one.
The annual maximum that one person can contribute to a Roth IRA—which allows you to put post-tax money into an account that will then grow tax-free and allow the money in it to be withdrawn tax-free—is $6,500 for 2023 and $7,500 if you're 50 or older.
But once your Modified Adjusted Gross Income (MAGI) rises to $138,000-$153,000 for single filers and $218,000-$228,000 for those married filing jointly [2022], you begin to phase out of Roth IRA contributions. If you make more than $153,000 (single) and more than $228,000 (married) in 2022, the Roth IRA is off limits to you. That's when you can turn to the Backdoor Roth IRA process to indirectly contribute to your Roth IRA.
You do that by contributing to a traditional IRA (again, a maximum of $6,500 for 2023), and then a few days after that money hits your account, you transfer the money from the traditional IRA to the Roth IRA that you've already set up. This process will result in a pro-rated tax bill if you already have money in a traditional IRA, so if you want to perform the Backdoor Roth, you'll need to send that money elsewhere.
In late 2021 and early 2022, a potential bill was floated out of Congress that would have wiped out the ability for anybody to make a Backdoor Roth IRA. That provision never passed, though, and as such, the Backdoor Roth IRA lives on for those who make too much money to make regular Roth IRA contributions.
If you have a Schwab account, here's how to utilize the Backdoor Roth IRA process.
Step 1: Contribute to Your Schwab Traditional IRA
Log in to your account at Schwab. If you don’t have a traditional IRA at the broker, click the “Open An Account” button at the top of the page. Follow the prompts to set up your account and fund it.
If you already have a traditional IRA at the broker, click “Transfers & Payments” instead.
Then, choose how you’d like to transfer funds. An online transfer will be the quickest and easiest way to contribute for most people.
Choose to transfer cash only, then select the account to transfer cash from, and select your IRA in the “To” field.
An online transfer into the traditional IRA will take 1-2 business days if you’re moving money from an external bank account, but it will complete on the same day if you’re moving money from another Schwab account. Once you set up the transfer and the money lands in the traditional IRA account, it's time to move to the next step.
Step 2: Convert Your Schwab Traditional IRA to a Roth IRA
Once your money shows up in your traditional IRA, you’re ready to convert the balance to a Roth IRA. From your account page, follow the same steps to get to the transfer page.
Select Online Transfers.
This time, select your traditional IRA as your “From” account and your Roth IRA as your “To” account.
After a warning about the tax implications, you’ll see a new page for converting your traditional IRA to Roth IRA. Select the “From” and “To” accounts again, and then choose a “Full Conversion.”
You’ll see another window about tax withholding for IRA distributions. Select “No” for federal and state tax withholding if applicable.
Click Submit on the final page and your conversion is complete!
Step 3: Choose Your Roth IRA Investments
Once your cash reaches your Roth IRA, it’s time to choose how to invest your money.
From your main account page, hover your mouse over “Trade” and select the type of securities you’d like to buy. For this example, we’ll choose “All-In-One Trade Ticket” as it can be used to purchase any type of security.
Make sure you have your Roth IRA selected, choose the type of investment you’d like to buy under the “Strategy” dropdown, and enter the ticker symbol. In this example, we’ve chosen Schwab’s S&P 500 mutual fund.
Select “Buy,” enter the amount to invest, and select whether you want to reinvest dividends and/or capital gains.
Make sure the details of the order are correct on the Verify Order page and click “Submit.” Once you see the confirmation page, you’re done!
Schwab makes the whole process quick and easy, especially if you already have money at the brokerage that you’d like to move into your Roth IRA.
If you’re still wondering about whether a Backdoor Roth IRA is worth it for you or you want more details on how they work, check out our in-depth tutorial on How to Do a Backdoor Roth IRA. But whether taking the time is worth it, know this: consistently implementing the Backdoor strategy could eventually make you a Roth IRA millionaire.
Are you using the Backdoor Roth IRA to diversify and minimize taxes? Do you do your Backdoor Roth IRA(s) at Schwab each year? What problems have you run into?
Great and timely post! I contribute just a little less than the max allowed contribution ie $6498 instead of $6500. This is to ensure I have a zero amount in my Traditional IRA at the end of the year. There are many anxious posts about dollars and cents left behind in the tIRA and I dont want any of that – thought I would share that.
Wrong. Contribute $6K ($6500 for 2023). Then if there’s a couple extra dollars, just convert them too. There are no limits on conversions, only on contributions.
Any new law that was mentioned last year about getting rid of backdoor roth IRA? Is backdoor roth conversions still allowed in 2023 for high income earners?
Schwab has recently changed their website and the screenshots don’t reflect how the changes. there is a new tab at the top of the Schwab website called “Move Money” which does what it says.
“Transfers and payments” is no longer a subcategory within “accounts”.
Schwab has recently changed their website and the screenshots in this article don’t reflect these new changes. There is a tab at the top of the Schwab website called “Move Money” which does what it says.
“Transfers and payments” is no longer a subcategory within “accounts”.
It was confusing for a little while after this update.
Yea, every time we do one of these tutorials with Vanguard, Fidelity, or Schwab it seems a couple of months later they change the interface. It’s usually not that hard to figure out, but it does kind of defeat the purpose of this kind of a post.
This thinking isn’t right. You make your full contribution. You make sure your account is set up to not automatically invest so that your contribution goes to cash and/or your settlement fund. You then transfer the funds. Let’s say $2 shows up a few days later. You convert that too. You’ll pay tax…on the $2. This little amount shouldn’t show up months after the initial contribution. If you’re really that worried and you did your contribution in the first half of the year, log in by December 20 of that year and convert the rest over if there is any so you have a $0 balance on Dec 31
Even if you don’t convert it, it’s not that big of a deal. Being pro-rated is a spectrum, and the additional tax from being prorated on $2/$6,000 may even round to zero. You just fix it the next year.
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
sorry, this was meant as a reply to Varun
WHich investments have you chosen for your Roth IRA?
You need an investment plan. This question can’t be answered accurately/usefully in isolation.
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
The answer to your question in my case is the Vanguard REIT Index fund, but that’s hardly a recommendation for you. There was a time my entire portfolio was in that Roth IRA.
Can I close the traditional ira after the transfer of money to roth ira?
Recommended to leave it so you can utilize it every year when doing a backdoor Roth. Otherwise you have to go through the trouble of opening a new one each JAN.
I guess you could but what’s the point? They just sit open and empty for a year until they get used again.
I use Schwab and didn’t realize the contribution limit for 2023 increased to $6500. I had contributed 6K and completed the backdoor conversion step already earlier this month. After realizing this, I went ahead and contributed an additional $500 to my TIRA. This showed that it went into my TIRA account on Thursday, January 19th. I tried to do the conversion step today, Sunday January 22nd but it wouldn’t allow me to. The account kept showing up like I didn’t have anything to transfer, even though on the account balance page the $500 balance shows up in the TIRA. IS THERE A NUMBER OF BUSINESS DAYS WITH SCHWAB THAT YOU HAVE TO WAIT BEFORE COMPLETING THE CONVERSION STEP?
It’s common with all companies to have to wait up to a week for things to settle. No big deal. Just check back next week.
I am so happy I found this article at this point in time! I recently exceeded the income threshold, so I did not contribute to my Roth for 2022.
Since I am still able to contribute to my Traditional IRA for 2022 until tax day, is there any drawback to contributing both years now then converting the total amount? Essentially – Contribute $6,000 for 2022; Contribute $6,500 for 2023; Convert $12,500 from Traditional to Roth and report on 2023 form 8606.
No, except the $6,000 contribution goes on the 2022 8606.
My income went over limit this year in Oct. I moved everything I contributed to my RIRA to a TIRA. Now I will convert that to RIRA. Is it ok to keep contributing to my RIRA even though I’m way beyond the limit and do and backdoor at the end of the year? Or I contribute to TIRA and do backdoor at the end of the year?
thank you for this article.
I just learned about the backdoor roth but 5 days too late. I started the process with schwab. I contributed 6k to traditional IRA for 2022 and invested the money and 5 days later went to do the roth conversion but there was $99 gain on it. Can i still convert the whole thing $6099 and do the form 8606 and pay taxes on the $99. I understand some extra paperwork for my accountant, but wanted to check. I didn’t know if it is so much hassle, almost wishes i didn’t have that $99 gain. I wanted to clear up the issue before doing the 2023 contribution and this time convert cash the next day. Thanks so much for all information provided. Learning so much every day from your podcasts
Yes.
The hassle is just putting $99 on a tax form instead of $0. Not too bad.
For further clarity on the transfer from Traditional to Roth step, if I have a mix of cash and securities in my Traditional IRA, can I use the transfer “Positions and Cash” option to complete transfer step, or is there another step to move securities?
How do I specify the year of contribution? It is Feb 2023 right now but I wanted to make my contribution for the 2022 tax year not 2023. I did not see anything to check off to specify this was for 2022. Also I had $6000.52 and I did the complete transfer. Will I get punished for this?
There should have been a place to specify that. I worry you missed it. Better give them a call. The $6500.52 is fine.
I don’t know if this will be useful to anyone else, but: At this time, if your Roth IRA is under the Intelligent Portfolios management, your Roth IRA account will not appear as an option when filing the conversion form that they make you do. Not an issue, you just have to call the Intelligent Portfolios people, and they will do it for you. It looks like a lot of people had this problem, so I had to explain very little. They were expecting it. I imagine they will be fixing this soon. It was my first time doing this, thank you very much for your content!
Thanks for this comment… I’m having this problem at the moment and I was thinking that there was something wrong on my end..
How does the 5 year waiting period work? If every time u convert $ (annually) does the 5 year waiting period to withdrawal start over?? This is confusing..
Can anyone guide me as to what should be the federal and state tax withholding elections on the traditional IRA and Roth IRA accounts with regards to backdoor roth IRA setup? Thanks
Don’t have anything withheld.
I have not contributed anything to TIRA or RIRA. Can I still open a TIRA and at the same time RIRA and do the backdoor for this year? Thanks.
Yes.
A colleague of mine screwed up and elected to withhold tax. the $12,000 they were converting ended up having $1320 withheld. This happened in 2021. They didn’t even file Form 8606 in 2020 or 2021. What should they do now? Can their accountant file their 1099-R and 8606 and at least get a refund of the witheld tax?
Man, second person this month making this error. No problem with the tax. That all settles out at tax time. But you can’t really get that money back into the IRA. They do need to go back and file their 8606s though.
Any one have more advice on this front? Did this last December and haven’t sorted anything out!
Also any links to explain the “why” of not withholding (and why is Schwab giving the option if it’s a categorical “no” for everyone?)
The reason they offer to withhold for you is that people like having their taxes withheld. It’s convenient. And the government probably mandates they at least offer it. However, the underlying assumption that occurs by Schwab and the government when you do a Roth conversion is that you are converting pre-tax money. That is not the case with the Backdoor Roth IRA process. You are converting after-tax money. There is no tax due. So if you end up withholding tax, you just end up with less in your Roth IRA. Even if you were doing a Roth conversion of pre-tax money, you’d want to pay that tax bill from somewhere else if you could rather than the IRA. Witholding taxes represents a withdrawal from your IRA, which may generate taxes and penalties. Make your life easy and don’t have anything withheld from your Roth conversion. Trust me.
What more advice are you looking for? You’ll get the inappropriately withheld tax back at tax refund time. But you can’t get it back into the IRA. That ship has sailed.
So, I made my $6500 contribution early this year, and I went over the income limit. Do you know the process of doing a backdoor Roth in this situation with Schwab? I was told to fill out a lengthy form, but am wondering if there is an easier way that I can do it on my own, similar to this page. I do not currently have a traditional IRA account w/ Schwab. Should I make one and do a back and forth transfer, like outlined on WCI?
Or do I need to fill out the following form: https://www.schwab.com/resource/ira-roth-recharacterization-request-form
I am also unsure what to do once I fill out that form and it is transferred to the traditional IRA
Whatever they make you fill out to do a recharacterization is what you will have to do. Mor einfo here:
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
I’ll bet you do need to fill out that form. Once it is in the traditional IRA, do a Roth conversion. Basically the second half of the Backdoor Roth IRA process. If you hurry maybe you can get it all done by the end of the calendar year which will make your tax paperwork easier.
Thanks for the response. I filled out the form and uploaded it to Schwab. In my case (retroactive backdoor after already contributing), the initial recharacterization from Roth –> Traditional requires a document.
But the “conversion” from Traditional back to Roth can be done on the website. At least it appears this way. Not sure why there’s a difference in terminology.
Once this is complete, I will provide an update here for anyone in the same situation.
I already have a traditional IRA with money and would like to keep that one. Do I need to open up another new IRA to do the back door conversion? Does the Preexisting old IRA then need to be emptied to zero or just the new IRA that I used to transfer the money to the Roth? Also is there a limit to how much money that I can transfer to a Roth from a Traditional IRA?
If you have tax-deferred money in an IRA you need to do something with it before completing the Backdoor Roth IRA process. Probably best to do it before beginning. Or your conversion will be pro-rated. But sure, you can use an existing IRA. Just not one with mohey in it. Yes, empty all IRAs to zero by year end of the year you do the conversion. No limit on conversions, only contributions.
I have had a traditional IRA for many years (since 2013). For first 6 yrs I took deduction on my tax returns. Since 2019 for past 3 yrs I still put money in traditional IRA but couldnt take deduction given my tax bracket. I still put money in IRA.
This year I learn about backdoor RothIRA. I opened a new ROTH IRA account deposited $5500 into traditional IRA and moved $5500 into ROTH IRA indicating it to be a partial transfer. A colleague advised that this not how I am supposed to do a partial transfer. Did I get this wrong?
Why do a partial transfer? Convert the entire traditional IRA to a Roth IRA. Most of it has already been taxed. More info on how to do a Backdoor Roth IRA properly here:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
Reason is first 6 yrs I have taken deductions on the tax form so it hasnt been taxed. Onlu since 2019 deduction hasnt been taken. Plus for the 6 yrs that deduction was taken the money has grown.
So if you don’t want to pay the taxes and convert it all, you need to isolate the basis. So you need to do a rollover into a 401(k) that is the exact amount (well at least close) of the pre-tax dollars leaving only the basis behind to convert into a Roth IRA.
Need a little help, I think I cornered myself by compounding a bunch of boneheaded mistakes, everything this site says not to do, hoping that the path forward is still a decent one.
Timeline. Starting in Jan 2021 I had no retirement accounts.
Mar 2021 – I complete my basic Tax Return for the year 2020
Apr 2021 – Open a Traditional IRA with Schwab. Deposit $6K for 2020 and another $6K for 2021. These funds are from my post tax wages, haven’t claimed the deduction yet.
June 2021 – In the IRA I purchase and sell some securities take a loss for about $1K – Terrible I know
Dec 2022 – Add an additional $6K for Tax year 2022 – Now IRA account is about 17K in Cash
Some Interest Builds up about a $100
Today Feb 2024 – I open a Roth IRA and I stupidly do a partial conversion for 6K to it from my traditional IRA. My thought process was this was the 2020 6k that I paid taxes and never deducted so I should move it the Roth, not understanding that I’m supposed to 0 out any traditional IRAs
Now I am trying to figure out next steps. I put in a total of 18K into the IRA, Never claimed any of it as a deduction. Moved 6K of it to a Roth now. I can still amend my 2020 taxes if I need to and I actually haven’t done my 2021 and 2022 taxes, I’m due a very small refund for both so I put it off.
From my reading. I should convert all of it due to the ProRata rule, and I should be good since I never deducted these amounts from my taxes. But form 8086 will be more complicated now due to the losses I took. I will have that constant carry over, not fully understanding what that means but sounds like a future annoyance.
Since I did the conversion today, Schwab will send me a 1099-R next year. Since I can still complete each of my returns from 2020 do I complete an 8086 for each year? Or do I wait? The examples of this were not clear. In the guide it says you can do the roth conversion whenever even a decade later. So what would be the tax reporting process in that situation?
Thanks in Advance, this guide is amazing wish I came across it earlier.
An impressive string of Backdoor Roth IRA screw-ups for sure. Sounds like you’ve learned your lesson though.
Easiest fix is to just convert the whole darn thing to a Roth IRA and get the paperwork straight. There will need to be an 8606 filed for 2021 (hurry!), 2022, and 2023. Keep some record of your basis for that 2020 contribution too. Claim it of course even though you probably didn’t do an 8606 for 2020 and it’s too late to do it now.
Just because you’re getting a refund doesn’t mean you don’t have to file.
Here’s the main tutorial:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
and here’s a post that talks about fixing mistakes:
https://www.whitecoatinvestor.com/fix-backdoor-roth-ira-screw-ups/
Schwab has changed the screens, you might want to do an updated post. IMHO they made it worse(Probably a TDA thing) taking out the “Full Conversion” bit.
Thanks. Hopefully someone with a Schwab account will send us some updated screenshots. I don’t have a Schwab IRA.
Schwab actually has an updated video tutorial. https://www.schwab.com/content/how-to-convert-traditional-ira-to-roth-ira
This article contains incorrect information. If recharacterization is needed, a form must be filled out with Schwab. Transferring it online will result in a taxable amount on your 1099-R. Please correct this article, as it caused me to pay taxes again on the money moved from my traditional IRA to a ROTH IRA, following the process outlined in this document and completing an online transfer.
This article isn’t about recharacterizations. This one is though:
https://www.whitecoatinvestor.com/ira-recharacterizations/
If you do a BD Roth correctly and you’re being shown a taxable amount on your 1099-R, be sure to see if box 2b is checked. It usually is and thus taxable becomes non taxable.
Thanks for all the valuable information!! Very detailed and easy to follow. I have a follow up question. I have a traditional 401K and would like to roll it over into a Roth 401K. Is there a way around getting taxed on it if I only do a smaller amount at a time? What would be the best strategy to roll it over and are there any similar type strategies like the backdoor Roth?
That sort of “rollover”/transfer is typically referred to as a Roth conversion. Since the traditional account is usually tax-deferred, the entire amount of the conversion is taxable at ordinary income tax rates. You can possibly decrease the tax cost of that conversion by timing it when the market is down (good luck with that without a functional crystal ball) or by doing it over multiple years so none of the dollars are even in a higher tax bracket. But just spreading it out over weeks or months doesn’t change the tax bill.
If you wish to avoid taxation at all, just leave it in the traditional 401(k) or transfer it to another 401(k) or 403(b) or traditional IRA. Note that if you move it to a traditional IRA, it’s going to cause you pro-rata issues with any future Backdoor Roth IRAs you do.