Individuals who are active participants in an employer sponsored retirement plan (those eligible to participate in a pension plan and / or those with elective / employer matching / employer nonelective contributions to a profit sharing plan) and who exceed the AGI phaseouts for concurrent deductible traditional IRA contributions or Roth IRA contributions may still benefit from nondeductible contributions to traditional IRAs (no AGI phaseouts apply to nondeductible traditional IRA contributions). While earnings on nondeductible IRA contributions are tax deferred, they are ultimately subject to ordinary income tax rates upon distribution from the IRA, which may be significantly higher than preferential long term capital gains rates applicable to taxable brokerage accounts. The two step backdoor Roth strategy offers significant advantage over this one step approach by subsequently converting nondeductible contributions made to a traditional IRA to a Roth IRA (no AGI phaseouts apply to Roth conversions), which allows for the tax free growth of earnings if later distributions are qualified. However, IRS aggregation rules and pro-rata rules as applied to traditional IRAs must be respected in utilizing this strategy.
Notably, Congress has explicitly acknowledged the use of this approach in the Tax Cuts and Jobs Act of 2017, which has ameliorated previous concerns about application of the IRS step doctrine in reference to Roth IRA contribution AGI phaseouts when utilizing a backdoor Roth approach.