Is a backdoor ROTH better than direct contributions?

[rollacorolla]

Do backdoor ROTH conversions accomplish the same thing as a ROTH conversion ladder?  ie. make those funds available after 5 years (before age 59.5?)

If so, would that mean that for FI/RE purposes, a backdoor ROTH IRA conversion would be preferred even for a person who's income is eligible for normal rIRA contributions?

I'm still new to the FI community but we did manage to shrink our MAGI for 2016 and are eligible for rIRA contributions, which I've done just in time.  But I'm wondering if setting up a backdoor rIRA conversion would have been better anyway.

[dude]

If you are income eligible to make direct rIRA contributions, why would you bother going through the extra steps of making (non-deductible) tIRA contributions, then converting?

[rantk81]

If you are income eligible to make direct rIRA contributions, why would you bother going through the extra steps of making (non-deductible) tIRA contributions, then converting?

I have this same exact question for myself. My income pushes me out of the range for normal Roth IRA contributions. I don't know why I would want to pay taxes now on that money.  One would think that Mustachians will be in a much lower tax bracket in retirement when there is no longer a "firehose-of-income" from a W-2 job.

[rollacorolla]

Okay, after further investigation I think I see where I was confused.  Both conversions AND contributions can be withdrawn after 5 years without penalty, just not any earnings.  I had thought it was just conversions and not contributions.

[dandarc]

It's better than that - regular Roth IRA contributions can be withdrawn penalty and tax free at any time.

[dandarc]

Also - you are correct that a backdoor Roth contribution is a conversion, so you've got to wait 5 years on that.

For me, the calculus is this:
If eligible for deduction and at a high-enough (this varies by individual situation) marginal tax rate - Go with Traditional IRA, up to the deductible amount if in the phaseout range.
If eligible for regular Roth IRA Contribution, do that.
Otherwise, if you don't have existing tIRA money or you can move any tIRA to a 401K or similar first, then backdoor Roth IRA
If you can't do a backdoor Roth effectively, then taxable account, along with any money beyond tax-advantaged accounts you're going to invest.

[rollacorolla]

It's better than that - regular Roth IRA contributions can be withdrawn penalty and tax free at any time.

Thanks for that further clarification dandarc.

We will be maxing out our 401k+403b+457b for 2017.  I have stock options that need to get exercised and sold over the next few years, but now that I know the rules I think I can plan it out to keep our MAGI within the rIRA limit.