In this video, we’ll walkthrough a step by step tutorial on how to setup a backdoor Roth IRA account with Charles Schwab, how to contribute to backdoor Roth IRA account through a traditional IRA account by converting traditional IRA to Roth IRA, and introduce you to Form 8606.

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Time code:
0:00 – Intro
00:23 – How to open Traditional IRA & Roth IRA accounts
02:27 – How to contribute to backdoor Roth IRA (Convert traditional IRA to Roth IRA)
04:24 – Form 8606 Introduction

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Introduction:

Backdoor Roth IRA is an alternative way to save for retirement. A traditional Roth IRA has strict income limits that exclude many high-income taxpayers, which can limit their ability to save for retirement. However, with the backdoor Roth IRA, you contribute to a traditional IRA and then convert the funds to a Roth IRA. Charles Schwab is one of the leading financial institutions that allow investors to contribute to a Backdoor Roth IRA. In this article, we’ll provide step-by-step instructions on how to set up and contribute to a Backdoor Roth IRA with Charles Schwab.

Step 1: Open a Traditional IRA with Charles Schwab

The first step is to open a traditional IRA with Charles Schwab. If you already have an account with Charles Schwab, you can skip this step. Otherwise, you can visit Charles Schwab’s website and select “open an account.” You’ll be asked a series of questions, including your name, address, date of birth, and Social Security number. You’ll also be asked to select the type of account you want to open. Choose a traditional IRA.

Step 2: Fund your Traditional IRA

Once you’ve opened your traditional IRA, you’ll need to fund it. You can do this by transferring money from an external account or by depositing a check. Charles Schwab allows you to contribute up to $6,000 per year to your traditional IRA if you’re under 50 and up to $7,000 per year if you’re 50 or older.

Step 3: Convert your Traditional IRA to a Roth IRA

After you’ve funded your traditional IRA, you can convert it to a Roth IRA. This is the crucial step in setting up your Backdoor Roth IRA. You can do this by logging into your Charles Schwab account and selecting “convert to Roth IRA.” You’ll need to provide some necessary information, including the amount you want to convert and the type of tax return you’re filing. If you’re not sure how much to convert, consult a financial advisor who can help you figure out what’s best for your situation.

Step 4: Pay Taxes on the Conversion

When you convert your traditional IRA to a Roth IRA, you’ll have to pay taxes on the converted amount. The IRS treats this conversion as income, which means you’ll need to pay taxes on it in the year you convert it. Charles Schwab will send you a 1099-R form at the end of the tax year, which will show how much you converted and how much you’ll need to report as income on your tax return.

Step 5: Contribute Regularly

Once you’ve converted your traditional IRA to a Roth IRA, you can contribute to it regularly. You can contribute up to the annual IRA contribution limit, which is $6,000 if you’re under 50 and $7,000 if you’re 50 or older. Regular contributions to your Roth IRA will help you build up your retirement savings over time.

Conclusion:

The Backdoor Roth IRA is an excellent option for those with high incomes who want to save for retirement. Charles Schwab is a top-notch financial institution that allows investors to contribute to a Backdoor Roth IRA. By following the simple steps outlined above, you can set up and contribute to your Backdoor Roth IRA with ease. Remember to consult with a financial advisor if you’re not sure how much to contribute or if you have any questions about your retirement savings.