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IRA—which allows you to put post-tax money into an account that will then grow tax-free and allow the money in it to be withdrawn tax-free—is $6,000 for 2022 and $7,000 if you're 50 or older (though that number should rise in 2023).

But once your Modified Adjusted Gross Income (MAGI) rises to $129,000-$144,000 for single filers and $204,000-$214,000 for those married filing jointly [2022], you begin to phase out of Roth IRA contributions. If you make more than $144,000 (single) and more than $214,000 (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 $6,000 for 2022), 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 take advantage of 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.

backdoor roth ira with schwab

If you already have a traditional IRA at the broker, click “Transfers & Payments” instead.

backdoor roth ira with schwab

Then, choose how you’d like to transfer funds. An online transfer will be the quickest and easiest way to contribute for most people.

backdoor roth ira with schwab

Choose to transfer cash only, then select the account to transfer cash from, and select your IRA in the “To” field.

backdoor roth ira with schwab

 

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.

backdoor roth ira with schwab

Select Online Transfers.

backdoor roth ira with schwab

This time, select your traditional IRA as your From account and your Roth IRA as your To account.

backdoor roth ira with schwab

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.

backdoor roth ira with schwab

You’ll see another window about tax withholding for IRA distributions. Select No for federal and state tax withholding if applicable.

backdoor roth ira with schwab

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.

backdoor roth ira

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.

backdoor roth ira with schwab

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? Comment below!