Most of this article is adapted from a Knowledge Planet post, written by 老司机. ymlulu made some tweaks and formatting changes.

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Today we'll take a deeper dive into two topics: 401(k) contributions and backdoor IRA. Once you understand these two basics, the next article on the more advanced mega backdoor will be much easier to follow. I hope you find this article useful, and feel free to discuss and learn together!

These two moves are probably the most popular and easiest retirement planning strategies in North America, and every working professional should make good use of them.

Because all of my retirement accounts are at Fidelity, I'll use Fidelity's interface as the example below. I personally think the platform is simple and easy to use, and my retirement accounts from previous employers were also with Fidelity, so I never bothered switching.

Of course, different people have different preferences. Other brokerages that manage retirement accounts are broadly similar, so you can apply the same ideas elsewhere.

I previously saw Robinhood offer a 1% match on retirement account deposits. It's tempting to chase a little bonus, but I wouldn't trust an internet company with my retirement money. You can weigh the pros and cons yourself.

Making a 401(k) Contribution in Fidelity

In general, 401(k) contributions are automatically deducted from your paycheck, and the annual contribution limit for 2025 is $IRA500 (there's a catch-up boost for people age 50 and above, which most people probably won't need; if you're interested, you can look up the exact amount yourself).

At the same time, there is usually an employer match, which depends on company policy. Some companies offer as little as 3%, while others go up to 10%. For example, my company matches 50% of my contribute, up to 6Fidelity $2350Fidelity11750. This is free money, so the usual advice is to max out your own contributions first and then capture the company's match as well. Fidelityobinhood️ Note: my usual approach is front loading, which means raising my 401(k) contribution to 75% during the first few months of each year. That way, I can usually fill the account in just a few months and put that money to work sooner.

The downside, of course, is that cash flow will be tighter during the first few months, so you need to plan your spending and expenses ahead of time.

As the saying goes, the more you invest, the less cash you have. That's exactly the feeling here. Adjust based on your own needs. A common suggestion is at least 10%, and the total across all contribution options cannot exceed 75% (this limit varies by company; some allow 90%, so read the fine print below).

In the screenshot below, I'll set pretax to at least 10% (I usually use 75%). The others can stay at 0% for now, because we'll go through them step by step later.

️️️️Note 2: you can usually time your job change to squeeze some extra value out of the company. For example, if you're starting near the end of the year, I usually choose around November instead of January or February. That way, after onboarding you'll have a few pay periods, and you can quickly max out the 401(k) match, automatically adding another ten thousand dollars or so to my package. Nice.

Fidelity 401(k) offers a very wide range of investments, including stocks, bonds, index funds, target-date funds, mutual funds, self-directed stocks, and more. In my case, following the approach mentioned above, I invest through brokeragelink and manage my own portfolio, with both individual stocks and index funds. Retirement accounts are basically for conservative investing, so even though I bought Nvidia before its 2022 run-up, it was only a position worth a few thousand dollars.

️Note: I strongly do not recommend using the company's default target-date fund. That thing is really awful. When I first joined, I was a complete retirement-account beginner. After working hard for a year and seeing the market rise 13%, I was shocked to find that my retirement account was still down almost 10%. The management fee was charged as usual, and it wiped out the bonus from my work. Since then, I learned a painful lesson, dug deep into the returns of different investments, and never bought that product again.

I strongly recommend managing your own portfolio. The simplest way is to buy SPY. Historically, it has delivered a stable 7% annual return over the past century, which is far better than the A-shares market. Even during the bleak 2022 period, the market recovered everything within a little over a year and continued growing with the economic cycle.

Doing a Backdoor Roth IRA in Fidelity

Backdoor Roth is for high-income earners (2025 MAGI above $150,000 for single filers / $236,000 for married couples). The steps are as follows:

  1. Create a Traditional IRA and link a bank account. This IRA can stay in your account permanently, because it's only used for funding, and its balance is 0 most of the time.
  2. At the start of each year (or whenever you have extra cash), deposit no more than $7,500 (this limit increases by $500 each year, and people age 50 and above can add another $1,000).
  3. Once the money arrives, immediately or the next day execute the conversion: convert the entire Traditional IRA into a Roth IRA. This is tax-free because that $7,500 has already been taxed. At year-end, you'll receive a 1099-R, and when you file taxes you only need to indicate that this was a backdoor Roth. Your CPA and TurboTax will know what to do, because these are all qualified rollovers.
  4. After the conversion, you can invest inside the Roth IRA, which means tax-free growth. In addition, after holding the account for at least 5 years and reaching age 59½, you can also take tax-free withdrawals, getting the best of both worlds. For the actual investing steps, you can refer to the section above. Since gains are tax-free, you can also consider allocating a bit more to higher-risk, higher-reward stocks.
  5. After the conversion, the system will ask whether you want to close the IRA. My advice is not to close it, otherwise you'd have to reopen it every year, and your tax documents would become a mess. I usually keep using one account so all the records stay together, which is clean and simple.
  6. The asset transfer screenshot involves too much personal financial-account information, so I won't show it in detail. The steps are very simple; just click through one step at a time.

️Note: if your income is below the $150,000 / $236,000 threshold for single filers / married couples, you can contribute directly to a Roth IRA and don't need this step. If one spouse is above the $150,000 limit and the other is below it, as long as the household total is above $236,000, even the lower-income spouse cannot contribute directly. In that case, both people should do a backdoor Roth, otherwise it can trigger Fidelity's penalty (I think the IRS charges a daily fine until it's corrected).

️Note 2: the annual limit increases every year, but you cannot backdoor more than that year's limit. Any excess will also trigger a penalty, and you'll need to pay additional tax and do a correction (reverse convert), which is cumbersome. In short, it's better to contribute one hundred dollars less than to go over by even twenty dollars, because otherwise it isn't worth it.

Summary

Okay, now that you know these two basics, the next article on the more advanced mega backdoor will be much easier to follow. I hope you find this article useful, and feel free to discuss and learn together!️️

The core idea of the articles that follow is to use retirement accounts to save money, thereby reducing taxes for the current year. Later, after retirement when income falls, you withdraw the money for use, and the tax rate at that time will be lower. On top of that, these accounts can also be used for investing, so the money doesn't sit idle.

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