Every year, I need to wait until my taxes are calculated before I know if my income will allow me to contribute to a Roth IRA. If I am over the limit, I do the traditional IRA and immediately convert it to a Roth. I do not have any deductible IRAs. My question is - Is there any reason why I shouldn't just automatically do the traditional IRA and immediate conversion to Roth every year, instead of waiting to see I qualify for a straight Roth contribution? Are there any downsides to this for someone with no deductible IRAs?
The difference is in how the distributed funds are treated. The advantage of making Roth IRA contributions directly versus a back-door conversion is that the Roth IRA contributions can be withdrawn at any time with no federal income tax or 10% early distribution penalty. Making a nondeductible IRA contribution that is then converted to a Roth IRA is a conversion. Roth conversion funds are subject to a five year waiting period, for each conversion, for exemption from the 10% early distribution penalty if you are under age 59 ½. The ordering rules for Roth distributions state that the contributions will be deemed to be distributed first, then conversions first in, first out.
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