I have heard about backdoor Roth IRA conversions from traditional IRAs and am interested in pursuing this as a way to save some extra income. However, before I try it, I want to make sure I fully understand the mechanics. Are there any pitfalls with the following strategy?
- Continue making maximum contributions to my employer's 401(k) plan on a pre-tax basis ($18,500 annually for 2018).
- Open a traditional IRA in 2018 and invest some baseline amount of after-tax dollars (minimum allowed balance in some low-fee index fund tracking a major index).
- Open a Roth IRA in 2018 and fund it with the maximum allowed amount of after-tax dollars ($5,500 in whatever I choose)
- In 2018 and in subsequent years, contribute whatever after-tax money I choose to the IRA opened in step 2 above, and then within the same year convert some amount (likely the maximum allowable amount) to Roth, transferring to the account opened in step 3, and paying any applicable tax (hopefully small)?
Does having pre-tax savings in my or my wife's employer-sponsored 401(k) accounts create any problems, or are there problems with holding the funds in a traditional IRA for a short period of time (less than a year, likely less than 6 months or preferably even 6 weeks)?
Is the only benefit to the above scheme, compared to simply contributing directly to a Roth IRA, that it avoids income limits? Or does it have other advantages (or not even that one)?
I understand tax rules could change, maybe even retroactively, but there's no way to tell the future so I am not concerned about that real possibility.