The Roth IRA is a great way to grow your money tax-free. However, there are limits on how much you can contribute to a Roth.
For those who earn too much to make traditional IRA contributions, a backdoor Roth IRA may be an option. Here’s how to do it at Fidelity.
1. Open a Traditional IRA at Fidelity
If you don’t have an IRA at Fidelity yet, you can easily open one. Just head to the company’s website, choose the type of account (Roth or Traditional) and fill out a few details.
Roth IRAs are typically used to accumulate investment earnings tax-free. However, they can also be a great way to reduce your taxable income, especially if you’re a high-earner who doesn’t have access to other retirement accounts.
Another perk of a Roth IRA is that you can invest in assets like real estate and natural resources. These can provide additional diversification and growth potential to your portfolio, as well as a safety cushion against market volatility.
If you have a traditional IRA or 401(k) at your current employer, consider rolling it over to an IRA at Fidelity instead. This allows you to take advantage of a broader range of investments and lower administrative fees that sometimes get passed along to plan participants.
2. Convert the Traditional IRA to a Roth IRA
Converting existing retirement accounts to a Roth IRA can provide tax-free growth and reduce the amount of taxes you pay in later years. However, the process can be complicated, so it’s best to seek the advice of a financial advisor.
There are many reasons you may want to convert your Traditional IRA to a Roth IRA. One reason is if your IRA account has recently suffered losses and you think the tax impact on those losses will be lower when it’s time to withdraw the money.
Another reason is if you have irregular income streams, such as an unpaid bonus or a business that produces a loss. These circumstances could be the perfect time to convert some of your IRA funds to a Roth.
If you convert a portion of your Traditional IRA, the IRS will determine your tax liability on a pro-rata basis. If you have several IRA accounts, this could result in a significant tax bill.
3. Convert the Roth IRA to a Traditional IRA
A Roth IRA is a tax-deferred retirement account that offers potential tax-free withdrawals in your later years. It also allows you to leave money to heirs without paying federal income taxes.
A Traditional IRA is often a good way to save money for retirement, but it can be a big hit on your tax bill during your working years. That’s why it’s important to convert a Traditional IRA to a Roth IRA.
If you’re thinking about converting your Traditional IRA to a Roth IRA, you should discuss it with a qualified tax advisor. You should also consider if it makes sense for your long-term financial goals.
The biggest drawback to a Roth IRA is that you must wait until you are at least 59 1/2 to withdraw funds from your account. This means that you may have to pay a 10% IRS penalty in addition to income taxes if you’re younger than this age.
4. Convert the Traditional IRA to a Roth IRA
If you have significant amounts of money in a traditional IRA, it may make sense to convert a portion of that into a Roth. It can help you take advantage of tax-deferred retirement savings that are not subject to required minimum distributions (RMDs).
Converting your IRA to a Roth allows you to grow your funds without worrying about RMDs, which can be especially helpful for retirees who want to avoid paying the 10% penalty on traditional IRA withdrawals before age 59 1/2.
However, you may owe taxes on the conversion. The IRS imposes a pro-rata rule that takes the total IRA assets and combines any deductible contributions with any non-deductible earnings to determine what percentage of the conversion is taxable.
If you decide to convert your IRA, a tax advisor can help you crunch the numbers and consider any potential income tax consequences. This is particularly true if you think your tax bracket will be higher in retirement than it was when you were working.