What Is the Pro-Rata Rule?

The IRS looks at all of your IRAs — traditional, rollover, SEP, and SIMPLE — as one big account when calculating taxes on a Roth conversion.

If you have any pre-tax money in those accounts, the IRS requires that each dollar you convert to a Roth includes both:

• Pre-tax dollars (taxable)
  
  
• After-tax (non-deductible) dollars (non-taxable)
  
  

The analogy I like to use when talking about the pro-rata rule is like adding cream to coffee. Just like every sip is a blend of both, so is every distribution or conversion from the IRA.

A Simple Example

Let’s say you have the following IRA balances at year-end:

• $84,000 in pre-tax IRA money (from deductible contributions and rollovers)
  
  
• $16,000 in non-deductible IRA contributions (after-tax money)
  
  
• Total = $100,000
  
  

If you convert $10,000 to a Roth IRA, here’s how the IRS applies the pro-rata rule:

• 84% of your IRA balance is pre-tax → $8,400 of the conversion is taxable
  
  
• 16% is after-tax → $1,600 of the conversion is tax-free
  
  

Even if you intended to convert only the after-tax dollars, the IRS forces the ratio calculation across all your IRAs.

Why the Rule Trips People Up

Many investors hear about the backdoor Roth IRA and think they can contribute after-tax dollars to a traditional IRA and immediately convert them to Roth with no tax owed.

But if they have any other pre-tax IRA money, the pro-rata rule applies — often making much more of the conversion taxable than they expected.

Strategies to Manage the Pro-Rata Rule

The good news? With some planning, you can manage or even avoid the rule’s sting:

1. Use an Employer Plan “Rollover” Strategy
   If your workplace retirement plan (401(k), 403(b), etc.) accepts roll-ins, you may be able to transfer your pre-tax IRA funds into it. This effectively “clears out” your pre-tax IRA balance, leaving only the after-tax IRA money available for conversion.
   
   
2. Time Your Conversions Carefully
   The IRS calculates the pro-rata formula based on your total IRA balances as of December 31 each year. This means two things:
   
   
   • If you want to reduce your pre-tax IRA balance, you need to move it (for example, into an employer plan) before December 31.
     
     
   • You’ll also want to avoid adding new pre-tax money — such as rolling over a 401(k) into an IRA — in the same calendar year you do a Roth conversion. Doing so would inflate your year-end IRA balance and increase the taxable portion of the conversion.
     
     
3. Keep Excellent Records of After-Tax Contributions (Form 8606)
   Every time you make a non-deductible IRA contribution, you need to file IRS Form 8606. This establishes your “basis” in the account and ensures you don’t pay tax twice on the same dollars.
   
   
4. Consider Partial Conversions Over Time
   Instead of converting all at once, some investors spread conversions over several years to manage their tax brackets.

Final Word

The pro-rata rule is one of the IRS’s least understood but most important provisions when it comes to IRA planning. Roth conversions can be a powerful wealth-building tool, but the real power comes from executing the strategy correctly. 

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