To make a backdoor contribution, first make a regular contribution to a Traditional IRA with your IRA custodian. You do not specify to the custodian whether the IRA is deductible or not; it is just treated as an IRA. Non-deductible simply means that you do not deduct the IRA contribution on your 1040 tax form (the transaction is recorded on form 8606 and submitted with your tax return).
As soon as the contribution posts, convert to a Roth IRA. Accomplish this transaction by selling the shares in your Traditional IRA and using the funds to buy shares (or open a new account) in a Roth IRA.[note 1]
Since your initial contribution was non-deductible, you pay tax only on the difference between the converted value and the amount contributed, and since you held the Traditional IRA for only a few days, the tax should be trivial. Thus, even though you are over the limit, you are in essentially the same situation as if you had made a contribution to the Roth IRA.
A couple of my friends have been using this trick for a while. This is fairly well known and popular.
Just be aware that you should not have any deductible IRAs (e.g. previous employer 401k converted to IRAs) for this to be an easy conversion. If you do, it becomes complicated.
Mistake 1: Not Paying Attention to the Pro-Rata Rule
If you’ve heard about any sort of hitch with a backdoor Roth IRA, you’ve probably heard about the pro-rata rule. What that means is that if an investor owns additional Traditional IRA assets that have never been taxed, such as a rollover IRA–in addition to the new Traditional IRA that she hopes to convert to a Roth via the backdoor–the taxes she’ll owe on the conversion will depend on her ratio of IRA assets that have been taxed to those that have not. If the old, never-been-taxed IRA assets dwarf the new IRA consisting of already-been-taxed assets, most of the new IRA assets will be taxable when converted to Roth
I too was ignorant in my early employed years but over the last few years Ive done this backdoor trick many times. I just put 5500 into my regular Fidelity IRA and then transfer next day into Fidelity Roth IRA. If you have a Roth IRA with Millenium ( which has fees ) you can even use the money to invest in RealtyShares investments.
Wow. This is good to know. That makes a ton of sense if you’re above the income limit to deduct IRA contributions. If you can’t deduct it now, might as well backdoor it to avoid taxes later.