How to Backdoor Roth Schwab Tutorial [with Screenshots] | White Coat Investor (2024)

By T.J. Porter, WCI Contributor

A Backdoor Roth IRA is a great way to contribute to your Roth IRA even if you exceed the account’s income maximums. However, each broker makes the process slightly different. We've already written about how Vanguard account holders can contribute to their Backdoor Roth IRAs, and we've discussed how to do it with your Fidelity account, as well. But what about using a Backdoor Roth IRA if you deal with Schwab?

Today, you'll learn how.To get started, you’ll need to make sure you have both a traditional and a Roth IRA at Schwab. If you don't already have those accounts, that should only take a few minutes to accomplish. Then you’re ready to get started with the Backdoor Roth IRA process.

First, though, let's review what a Backdoor Roth IRA is and why you might need one.

The annual maximum that one person can contribute to a Roth IRA—which allows you to put post-tax money into an account that will then grow tax-free and allow the money in it to be withdrawn tax-free—is $6,500 for 2023 and $7,500 if you're 50 or older.

But once your Modified Adjusted Gross Income (MAGI) rises to $138,000-$153,000 for single filers and $218,000-$228,000 for those married filing jointly [2022], you begin to phase out of Roth IRA contributions. If you make more than $153,000 (single) and more than $228,000 (married) in 2022, the Roth IRA is off limits to you. That's when you can turn to the Backdoor Roth IRA process to indirectly contribute to your Roth IRA.

You do that by contributing to a traditional IRA (again, a maximum of $6,500 for 2023), and then a few days after that money hits your account, you transfer the money from the traditional IRA to the Roth IRA that you've already set up. This process will result in a pro-rated tax bill if you already have money in a traditional IRA, so if you want to perform the Backdoor Roth, you'll need to send that money elsewhere.

In late 2021 and early 2022, a potential bill was floated out of Congress that would have wiped out the ability for anybody to make a Backdoor Roth IRA. That provision never passed, though, and as such, the Backdoor Roth IRA lives on for those who make too much money to make regular Roth IRA contributions.

If you have a Schwab account, here's how to utilize the Backdoor Roth IRA process.

Step 1: Contribute to Your Schwab Traditional IRA

Log in to your account at Schwab. If you don’t have a traditional IRA at the broker, click the “Open An Account” button at the top of the page. Follow the prompts to set up your account and fund it.

If you already have a traditional IRA at the broker, click “Transfers & Payments” instead.

Then, choose how you’d like to transfer funds. An online transfer will be the quickest and easiest way to contribute for most people.

Choose to transfer cash only, then select the account to transfer cash from, and select your IRA in the “To” field.

An online transfer into the traditional IRA will take 1-2 business days if you’re moving money from an external bank account, but it will complete on the same day if you’re moving money from another Schwab account. Once you set up the transfer and the money lands in the traditional IRA account, it's time to move to the next step.

Step 2: Convert Your Schwab Traditional IRA to a Roth IRA

Once your money shows up in your traditional IRA, you’re ready to convert the balance to a Roth IRA. From your account page, follow the same steps to get to the transfer page.

Select Online Transfers.

This time, select your traditional IRA as your “From” account and your Roth IRA as your “To” account.

After a warning about the tax implications, you’ll see a new page for converting your traditional IRA to Roth IRA. Select the “From” and “To” accounts again, and then choose a “Full Conversion.”

You’ll see another window about tax withholding for IRA distributions. Select “No” for federal and state tax withholding if applicable.

Click Submit on the final page and your conversion is complete!

Step 3: Choose Your Roth IRA Investments

Once your cash reaches your Roth IRA, it’s time to choose how to invest your money.

From your main account page, hover your mouse over “Trade” and select the type of securities you’d like to buy. For this example, we’ll choose “All-In-One Trade Ticket” as it can be used to purchase any type of security.

Make sure you have your Roth IRA selected, choose the type of investment you’d like to buy under the “Strategy” dropdown, and enter the ticker symbol. In this example, we’ve chosen Schwab’s S&P 500 mutual fund.

Select “Buy,” enter the amount to invest, and select whether you want to reinvest dividends and/or capital gains.

Make sure the details of the order are correct on the Verify Order page and click “Submit.” Once you see the confirmation page, you’re done!

Schwab makes the whole process quick and easy, especially if you already have money at the brokerage that you’d like to move into your Roth IRA.

If you’re still wondering about whether a Backdoor Roth IRA is worth it for you or you want more details on how they work, check out our in-depth tutorial on How to Do a Backdoor Roth IRA. But whether taking the time is worth it, know this: consistently implementing the Backdoor strategy could eventually make you a Roth IRA millionaire.

Are you using the Backdoor Roth IRA to diversify and minimize taxes? Do you do your Backdoor Roth IRA(s) at Schwab each year? What problems have you run into? Comment below!