Hey guys,
I'm teetering on the edge of the Roth limits, and so started looking into non-deductible Traditional IRA contributions. From that, I moved quickly to the Backdoor Roth and started investigating it. Here is how I see it working right now, please correct me if I'm wrong somewhere. I'm also working entirely on the basis that I have no current Traditional IRA contributions.
- Non-deductible Traditional IRA contributions are done with post-tax dollars.
- Upon withdrawal, the earnings on any Non-deductible contributions will be taxed
- If I were to contribute $5500 in non-deductible contributions, and immediately convert it to a Roth IRA (A backdoor Roth), this is exactly equivalent to having a Roth IRA (assuming the $5500 doesn't appreciate in that short time)
- The ONLY difference I see, is that because this was a conversion from Traditional to Roth, the 5 year limit would apply allowing me to withdraw these funds in 5 years penalty free
As a result of this, it seems to me like a Backdoor Roth is at least as good, often better for FIRE people, than a Roth, as long as you don't have any Traditional IRA contributions.
I'm assuming I have a mistake in my reasoning here somewhere, otherwise this'd be common practice. Could anyone point it out for me?
Thanks