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IRA—which allows you to put post-tax money into an account that will then grow tax-free and allow the money in it to be withdrawn tax-free—is $6,500 for 2023 and $7,500 if you're 50 or older.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? Comment below!
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.