I'm looking into doing a backdoor employer contribution (traditional) 401k-> traditional IRA-> Roth IRA so that I can get another $30k or so of employer contributions as tax-exempt earnings.
Can you elaborate on this?
Unless Chuckles knows of a magical conversion loophole that I do not, then he's probably referring to a 5-year revolving Roth IRA account to avoid early withdrawal fees. I'm no expert in this myself since it's something I won't have to deal with for a while, but I believe it goes something like this.
The Setup:
1) You contributed all your money to Traditional 401k / IRA accounts to reduce your total tax burden to the lowest possible levels.
2) If you withdraw money from your Traditional 401k / IRA before you are old (69 1/2 I think) you have to pay a 10% early-withdrawal penalty, which you want to avoid if you can
3) In Roth accounts you can withdraw principal payments after 5 years without an early-withdrawal penalty, after all you've already paid taxes on that money. Any capital gains you withdraw though you will owe the early-withdrawal penalty on.
4) You can convert money from a Traditional account to a Roth account without paying the 10% early-withdrawal penalty. After all, you aren't withdrawing it, you're converting it to a different type of retirement account.
5) Any money you convert from a Traditional to Roth will be counted as income and taxed at your current tax rate. There's no free lunch here.
6) Money you convert from Traditional to Roth counts as a "principle" in your Roth account.
So the plan goes something like:
1) Convert as much money as you can from Traditional to Roth before you get into the higher tax brackets. Do this every year.
2) After 5 years the money you converted is eligible for withdrawal. No further taxes or penalties are required.
So really you just have to have enough money in Roth / other accounts to sustain you for those first 5 years. Every year after that you will have money available in the Roth that was originally in the Traditional account.
The benefit is that you can almost entirely avoid the 10% early-withdrawal penalties while enjoying the larger benefits of Traditional accounts (at least for us High-income-while-working and Low-income-in-retirement folks).
The 401k -> Traditional IRA bit comes from pre-2008 rules where you could only convert from Traditional IRA to Roth IRA. So when you retired or changed jobs you'd convert the 401k into a Traditional IRA first. Now the rules let you convert from 401k directly to Roth IRA, so that step isn't really necessary.
Again, I'm not 100% sure on this strategy, so if I got something wrong please correct me.