Most physicians and high income earners are familiar with the Roth IRA and its backdoor component. The advantage of a Roth IRA is that we fund it using post-tax income but any gains upon withdrawal are tax-free. The potential upside can be huge since there can be quite a bit of growth after decades of investment. The income phaseout for the Roth IRA begins at $125,000 and $198,000 for single and joint filers, respectively. This excludes most physicians, but we can still fund a Roth IRA. The following are the steps to do so through E*Trade.
It is important to remember that in order for funding a backdoor Roth IRA to be a tax-neutral event, you must not have any invested funds in a traditional IRA.
The basic premise of funding a backdoor Roth IRA is to contribute first to a non-deductible traditional IRA, then make a conversion to a Roth IRA.
Open and fund a Traditional IRA account
After logging onto E*Trade, the upper right corner of the website should have an option to “Open Account”. Click that and you will get a list of accounts to open.
Choose “Traditional IRA”. You will need to fill out your personal information. The account can be opened immediately. You can actually keep a Traditional IRA open without any funds for future years’ of funding your backdoor Roth IRA.
After the Traditional IRA is opened, you can fund it immediately. Again, the process is to fund you Traditional IRA, and then convert it into a Roth IRA. The 2021 contribution limit is $6,000 ($7,000 for those over age 50). Your spouse can contribute to his own as well regardless of earned income.
Assuming that you are funding your Roth IRA on E*Trade, you already have linked external accounts or a savings account. Transfer $6,000 (or $7,000) over to the Traditional IRA!
Convert the Traditional IRA to a Roth IRA
The transferred fundings typically take roughly a week to settle. Don’t fret, and just set a reminder to log back on after a week. Afterward, head over to the E*Trade Roth conversion page.
Click the checkbox acknowledging that the process cannot be reversed. You can then choose an existing Roth IRA in the dropdown menu to convert your Traditional IRA to, and the amount that you want to convert. You’ll want to convert the “entire amount” to Roth so that you can clear out your IRA basis so that you can rinse and repeat in subsequent years. The next screen will look like this:
You can opt to leave the Traditional IRA account open so that you can use it for your backdoor Roth IRA in subsequent years. The dollar amount to convert should be the full amount ($6000 for 2021, and $7000 for those over age 50). You do NOT need to withhold any taxes since you are contributing after-tax funds to the investment. You’ll see the confirmation screen next:
Click ‘confirm’, and you’ll be set! The funds in your Roth IRA ought to post right away, and you can start investing.
You might also like: How to file your backdoor Roth IRA through HRBlock Online Edition
Let us know if you have any questions in the comments below!