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How To Open and Contribute to a Backdoor Roth IRA

To be honest, I’ve avoided this post for a while. I think I wondered if others adequately covered the topic. But I have had multiple doctors including one of my partners ask me about this recently. Plus, even with other guides I still struggled to open and contribute to our backdoor Roth IRA for the first time in 2023.

So, without further ado, here is a clear, concise, step-by-step guide to open and contribute to a backdoor Roth IRA!

But first some quick background on the backdoor Roth IRA…

What is a Roth IRA?

The Roth IRA (Individual Retirement Account) is named after Senator William Roth who introduced the concept. Anyone who earns active income can open this type of account (I do explain a caveat to this at the end).

With a Roth IRA, the IRS taxes your money right at the time of contribution. The money then grows tax-free and but the IRS never taxes it again upon withdrawal. The contribution limit in 2024 is $7000 and the general rule for age of withdrawal without penalty is 59½. 

Ok, here’s the kicker…there is an income limit to contribute to a Roth IRA. The income limit in 2024 is $161,000 for individuals and $240,000 for married couples filing jointly. Most physicians will again be above these limits.

Regarding other investment account, you can find an Updated Quick and Dirty Guide to All Types of Investment Accounts for Doctors here.

What then is the “backdoor” Roth IRA?

Let’s say your income as a married couple is above $240,000. You already maxed out your 401(k) and 457(b) options. You want to maximize your tax advantaged investing before going into a taxable account.

What you can do is contribute $7000 to a Traditional IRA. Because you are above the income limit, the IRS taxes your contributions. Leave it in the Traditional IRA and the IRS will tax your money again upon withdrawal.

BUT…the government will now allow you to roll your (now after-tax) Traditional IRA contributions into a Roth IRA once a year. Once you complete this conversion, the money grows tax free and never see a tax again, even at withdrawal. You are contributing to a Roth IRA through the backdoor…hence the nickname.

And, as a reminder, you have until April 15th of the following year to contribute for the previous calendar year. This means you have from January 1, 2024 until April 15, 2025 to contribute to the backdoor Roth for 2024.

Should doctors invest in a backdoor Roth IRA?

Yes. I generally consider the backdoor Roth the third “bucket” in most doctors’ investment account waterfall. After a 401k/403b and maybe a 457. It has some great advantages and can even be roughly considered an extra emergency fund.

Selenid and I actually didn’t invest into a backdoor Roth for the first time until 2023. Mainly because we allocated that investment money towards real estate from 2021-2022.

But in 2023, with our real estate portfolio up to 15+ units, we invested in the backdoor Roth.

As a quick aside, if you are a resident of fellow, a Roth IRA is a great investment account and maybe the top one to consider. As a trainee, your income is below the limits to contribute directly so you don’t need to worry about this backdoor nonsense. Plus you are in the lowest tax bracket possible. So your investment will get minimally taxed and then never taxed again! So, in 2020 as a fellow, I did contribute what I could (~$700) into a Roth IRA.

Now, let’s get into it!

How to open and contribute to a backdoor Roth IRA

I’m going to use Vanguard in this walkthrough. Because that is who I have my Roth IRA with. Another great option is Fidelity. But pretty much any brokerage will be similar in terms of logistics and steps.

And this serves as an important reminder that with a Roth IRA, you get to choose which brokerage you invest with! It’s not like an employer-sponsored retirement account like a 401k where you are stuck with whoever the employer chooses.

Step 1: Get logged on

Seems silly to include this but it stumped me for a rather embarrassingly long time trying to figure this out my first time.

When you first arrive at the Vanguard website, you won’t see a “log in” tab. Instead, you first need to click on “Personal Investors” to move forward.

open backdoor Roth IRA

After that, you will see the “Log In” button in the top right. If you already have an account with Vanguard, just click there to log in. If not, click on “+ Open an account” to register.

open backdoor Roth IRA

Step 2: Open a traditional IRA account

Once you log in, you will go to a dashboard page like this:

traditional IRA

The area you need to pay attention to is the left column where it says “Accounts.” If this is your first time, you won’t have any accounts listed there.

So, you will need to open a traditional IRA account first. Because remember, the backdoor Roth IRA works by first contributing to a traditional IRA, where your money is taxed, and then converting that into a Roth IRA.

So the traditional IRA is a necessary first step.

Here’s how to open this account

Click on “+ Open an account” on the left hand side of your dashboard page.

Vanguard will ask how you would like to start. Basically, how are you going to contribute money to this account. In the case of a backdoor Roth IRA, you are going to select the first option – transferring from your bank.

traditional IRA

You will then get a few more prompts asking how you would like to manage the account (self) and who the money is for (you). Then you will have the option to select a traditional or Roth IRA. Pick the traditional IRA option and move forward.

IRA

After you select the traditional IRA option, you will be taken to a page where you will choose how much you’d like to contribute (up to $7,000 in 2024) and add your bank account information to transfer the money.

It will also ask you what funds you would like to invest this money in once it is transferred to the account. However, you don’t want to invest this money yet until it is converted into the Roth IRA account.

As a result, you just want the money to stay in the “Federal Money Market (Settlement Fund.” So make sure this is checked off as below:

IRA

Congratulations, you now have a traditional IRA account! It will take up to 7 days for your money to transfer from your bank into this account. I usually set a colander reminder to check back every 2-3 days to see when the money finally hits the account.

But don’t worry, there’s still another action you have to take anyway…

Step 3: Open a Roth IRA account

This step is pretty similar to the previous one. Just go through the same mechanism to add a new account.

Except this time, select that you would like to open a Roth brokerage IRA:

Roth IRA

You can say that you would like to use the same bank or a different one to fund this one and then just fund it $0 or $1 for now.

Now you are ready for the next step!

Step 4: Convert your traditional IRA contributions to Roth IRA contributions

This is where the magic happens.

Once the money that you contributed to your new traditional IRA hits from the bank, you are going to convert them to Roth IRA contributions. Then, they will never be taxed again. Magic!

To do this, you are going to click on the Traditional IRA account on the right have side of your dashboard page. You will then see a page like this:

Roth IRA

In your case, you will see an amount equal to your contributions next to “Funds available to trade” and “Funds available to withdraw.” Mine shows $0.00 because I already converts my contributions to my backdoor Roth.

As a side note, if your contributions show up next to “Funds available to trade” but it still shows $0.00 next to “Funds available to withdraw,” that just means your contributions have not transferred fully from your bank yet. Check back in a day or so and once they show up in both places, you are ready to go.

Now, at this point, you are going to click on the “Convert to Roth IRA” button

You will have to click through a few pages just making sure you understand the tax ramifications of this conversion. You will also need to confirm that you do not want to withhold any taxes from this conversion.

Just confirm these (remember, you did not withhold any taxes on your traditional IRA contributions because you are above the income limit so this does not really apply to you) and move on.

You will now enter the amount you want to convert (all of it), confirm once again, and voila, you contributed to your backdoor Roth IRA!

But there is one last important step…

Step 5: Invest your contributions!

Honestly, this is where I see most investors slip up.

They get through this whole process and pat themselves on the back for contributing to their backdoor Roth. But then the money stays in the Settlement Fund a.k.a. money market account and never actually gets invested!

So, after you make your conversion, you can click on the Roth IRA account on your dashboard to get to a page like this:

Roth conversion

Click the “Transact” button on the top right. You will then be taken through the process of selecting the funds that you would like to invest these contributions into. Ideally this will consist of low cost, broadly diversified index funds.

For me, you can see that I invest my Roth IRA via a two fund for life approach which I discuss here.

In your case, just invest it via the strategy you lay out in your written financial plan. And if you don’t have one yet, use my written financial plan to help create your own!

Now, sit back and ignore your investments. At most, come back in a year to contribute again and rebalance your investments to your preferred asset allocation.

And then the last step…

Step 6: Determine if you can invest in a spousal IRA

If your partner works as well, make sure they are investing in a backdoor Roth IRA as well. And even if your spouse does not work, they are eligible to open a spousal Roth IRA.

This process is nothing different than the process above to open and contribute to your own backdoor Roth IRA. They just do it in their own name…

Congratulations!

If you made it this far, you just succeeded to open and contribute to your backdoor Roth IRA! This is a huge step towards your financial freedom.

Continue to contribute year after year and you will have a significant portion of your nest egg in tax free investments, giving you more flexibility in your retirement/financial freedom.

And if you are looking for a one-stop actionable guide to creating your own personalized path to financial freedom, check out my best-selling book, Money Matters in Medicine!

What do you think? Did you open a backdoor Roth IRA this year? How did it go? How do you invest these contributions? Let me know in the comments below!

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    The Prudent Plastic Surgeon

    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

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