How does the "backdoor Roth IRA" work?

Assuming the taxes in retirement will be lower, then a Traditional IRA with tax-deductible contributions is a better choice.
 

However, not everyone qualifies for a traditional IRA with tax-deductible contributions. And not everyone qualifies for a Roth IRA either.

Still there is a way to have an IRA, which is called a "backdoor Roth IRA".

If you don't qualify for a Traditional IRA with tax deductible contributions, you still can open a Traditional IRA account. 
Your contributions will not be tax deductible but the money can be relocated from a Traditional IRA to a Roth IRA. After that the distributions will be tax-free. The money will grow tax-deferred. 

Here is how the conversion works step by step:

1. Open both, Traditional and Roth IRAs accounts with the same institurion.

2. First contribute to Traditional IRA.

3. As soon as the money comes into the Traditional IRA account convert the complete cash amount to Roth IRA (usually need to fill out a conversion form).

4. Repeat every year. 

It is convenient to contribute and convert the entire yearly contribution as lump sum due to paperwork. 
  

There are various options for IRAs accounts: from investments accounts which allow only mutual funds to brokerage accounts where you can buy stocks. 

Watch out for fees. Some offer no-fee accounts, and some have set-up, annual, termination or conversion fees. 


Contribution limit for both traditional and Roth IRA for 2017 is $5,500 ($5,600 if you 50 or older).  

In a Traditional IRA withdrawals are allowed starting age 59½ and the early withdrawal penalty is 10%. The required minimum distribution age is 70½.  

A Roth IRA is different - there is no age limit for early withdrawals. 
You can withdraw your contributions (contributions only, not earnings such as dividends, interest or capital gain) at any time without penalty.  
For the earnings there is a 5 year rule and the money have to be in the account for 5 years otherwise there will be a 10% penalty. 
Roth IRA also has no required minimum distribution rules.

The backdoor Roth IRA will close for contributions at 70½ because starting from that age no contributions are allowed to the Traditional IRA where the money has to go first.