Cetusnews seems to have vanished, so my comments are limited to what bee described.
1. Roth income limits. Here are some concerns about Kitces backdoor solution, a couple pragmatic and one a matter of principle.
I don't know how many 401(k) plans allow transfers from IRAs. If you can't segregate pre-tax and post-tax IRA money via an IRA to 401(k) transfer, backdoor conversions are often impractical. Too much pre-tax money in the IRA.
Also, even if you can move your pre-tax IRA money to your 401(k), that money will be stuck there, whether the 401(k) is a good plan or not.
The matter of principle is that, as Kitces stated, what makes backdoor conversions illegal is intent. The fact that you won't get caught if you follow his prescription doesn't make it legal. Just in case that matters. Me, I jaywalk daily and twice on Sunday.
3. Time value of Roths. Locking in rates can be good or bad. Would you lock in a
5 year CD at 3% now when you can get 2.
5% on an 18 month CD? There is potential value in flexibility - one can contribute to a traditional IRA and convert to a Roth some time in the future when taxes are lower (locking in that lower rate when it materializes).
Whether you want to wait depends on what your crystal ball shows for future tax rates from now until retirement, and perhaps beyond. Personally, I'm betting on higher taxes (and locking in via Roth conversions of past years' contributions), but that's just one individual's opinion.
Someone who has difficulty maxing out IRA contributions is more likely in retirement to draw steadily from an IRA for income. That will limit the growth of the IRA, so that RMDs (and taxes) don't grow out of control. On the other hand, if one can easily max out IRA contributions, the time value of the Roth becomes even more important.
Here's a numeric example showing that even if tax rates are somewhat lower in retirement, contributing to a Roth (if you max out) can be better than contributing to a traditional IRA. It comes out better because when you max out a Roth you're sheltering more dollars (in after tax value) than you would in a traditional IRA.
Say the person is in the 24% bracket, but will be in the 22% bracket at retirement.
Assume there's $
5500 in earnings, and $1320 (24% of $
5500) in a taxable account. Finally, also assume that the taxable account is 100% tax-efficient (no taxes along the way), and gets taxed 1
5% (cap gains) at the end.
The investor can either put the $
5500 into the Roth, using the $1320 from the taxable account to pay the taxes up front, or can put $
5500 into a traditional account, and invest the $1320 in the taxable account.
Even with the higher (24%) taxes up front, the Roth breaks even once the investments have grown 12
5% (i.e. 2.2
5 times the original value). From that point on, the Roth pulls ahead. I've shown below what happens at the 12
5% growth mark, and at the 2
50% (3.
5 times original value) point. That's still a lot less than Bee's growth (600%, to 7 times the original value).
Roth | Traditional + Taxable
Start: $5500 | $5500 + $1320
125%: $12,375 | $12,375 + $2970
-taxes $0 | ($ 2,722.50) + ($ 247.50) 22% tax, 15% cap gains
Net $12,375 | $ 9652.50 + $2722.50 = $12,375
250%: $19,250 | $19,250 + $4620
-taxes $0 | ($ 4,235) + ($ 495) 22% tax, 15% cap gains
Net $19,250 | $15,015 + $4125 = $19,140
