Pro-Rata Rule for IRA Conversions
The pro-rata rule says you can't cherry-pick only the after-tax dollars out of your IRA when you convert. The IRS blends all your traditional IRA money together, so part of every conversion is taxable.
Think you can convert just the after-tax money in your IRA and skip the tax? The IRS already closed that door. The pro-rata rule forces you to treat all your traditional IRA money as one pool, so every conversion pulls out a proportional mix of pre-tax and after-tax dollars, and you can’t hand-pick the cheap ones.
How it works
The rule looks at every traditional, SEP, and SIMPLE IRA you own and asks one question: what fraction of the total is after-tax money? Whatever that fraction is, that’s the share of your conversion that comes out tax-free. The rest is taxable. It doesn’t matter which account you actually pull from.
The formula is the after-tax balance divided by the total of all traditional IRA balances at year end.
A quick example
You have $10,000 of after-tax contributions sitting in an IRA and $90,000 of pre-tax money across your other IRAs. That’s $100,000 total, 10 percent of it after-tax. You convert $10,000 expecting it to be tax-free. It isn’t. Only 10 percent, or $1,000, comes out clean. The other $9,000 is taxable income, even though you “only converted the after-tax part.”
The part most people miss
This rule is what breaks the backdoor Roth for a lot of high earners. The backdoor move, contributing to a nondeductible IRA and converting it, only works tax-free if you have no other pre-tax IRA money. One old rollover IRA in the background poisons the whole calculation. The fix is sometimes to roll those pre-tax dollars into a current 401(k), which the pro-rata math ignores, leaving a clean after-tax IRA to convert. See Roth IRA backdoor rules for high earners for the full sequence.
Why it matters for conversions
If you’re planning Roth conversions, the pro-rata rule decides what they actually cost. Run the fraction before you convert, not after. A conversion you thought was half tax-free can turn out almost fully taxable, and that surprise income can push you into a higher bracket or trip an IRMAA surcharge on your Medicare premiums.
The IRS blends your IRA money whether you like it or not. Know the blend before you pour.
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