To add to the question. Is there a real advantage to doing the backdoor Roth.
I guess they are - it grows tax free and can be withdrawn tax free after 591/2. From what I've read, if you expect to be in a lower tax bracket in retirement then the advantage may be less?
There's a huge advantage of doing a backdoor Roth. Assuming you're over the income limits to doing a Roth, and you are investing $5,000.
Option A: invest $5,000 of post-tax money in a taxable account. Over the years, you'll pay taxes on the dividends and taxes on any capital gains.
Option B: invest $5,000 of post-tax money in a non-deductible IRA and then convert it to a Roth IRA. Over the years, you'll pay no taxes on the dividends and no taxes on capital gains.
I'll take Option B.
Also:
But in most cases (assuming the OP or spouse has a retirement plan at work), if the OP's above the limit to make a direct contribution to a Roth, doesn't he lose the ability to deduct a regular IRA (at the same income threshold)?
Yes. The income limits on a deductible traditional IRA are much lower than the income limits for a Roth IRA. This has the effect of making many higher-income individuals not eligible for a T-IRA, but eligible for a Roth. And if they've exceeded Roth eligibility, then they're in backdoor Roth IRA territory.
This page explains it pretty well. The numbers are for tax year 2012. The numbers have gone up for tax year 2013, but the general principles are the same:
http://iracontributionlimits2010.com/ira-contribution-cheat-sheet-2012/http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
I don't use the option because I could use my 401k Roth option for any Roth needs.
Did you know you can contribute to a Roth 401(k) AND a Roth IRA? The contribution limits are independent of each other. If you're maxing your 401(k), and you have another $5,000 (or $5,500 for TY 2013) then you might as well put the additional $5,000 in an IRA (traditional deductible, Roth, or Roth via backdoor).