The Pro-Rata Rule for IRA Conversions

The pro-rata rule for IRA conversions requires the IRS to aggregate all your traditional, SEP, and SIMPLE IRAs when you convert part of one to a Roth or withdraw from a nondeductible account. The taxable share is calculated on your total pretax balance, not just the account you are touching.

The rule in plain terms

Imagine you own two traditional IRAs: one with $30,000 in pretax contributions (a normal deductible contribution) and another with $10,000 in nondeductible basis (a contribution you already paid tax on). The aggregate is $40,000 pretax. You decide to convert $10,000 from the first account to a Roth.

Under the pro-rata rule, the IRS does not say “you converted from the nondeductible account, so it is all tax-free.” Instead, it calculates: How much of your total traditional-IRA universe is pretax (nondeductible basis)? The answer is $30,000 pretax out of $40,000 total. That is 75%. So, 75% of your $10,000 conversion—$7,500—is taxable. The remaining 25%, or $2,500, is tax-free because it is treated as basis.

This rule applies whether you convert a little or a lot, whether you convert from one account or spread it across multiple accounts. The IRS aggregates first, then applies the pro-rata percentage to the entire amount you moved.

Why the rule exists

The pro-rata rule prevents tax arbitrage. Without it, a taxpayer could keep a large nondeductible IRA untouched, make a small deductible contribution, and then convert only the nondeductible account—essentially laundering basis through a Roth conversion without tax. The aggregation rule closes this loophole by forcing the taxpayer to “claim” both pretax and nondeductible dollars in proportion to the overall balance.

Calculating your aggregated balance

The aggregation test uses the balance as of December 31st of the year you convert (or make a nondeductible withdrawal). You must include:

• All traditional IRAs
• All SEP IRAs
• All SIMPLE IRAs (only if you have held it for more than 2 years; SIMPLE IRAs converted in the first 2 years face a 25% penalty)
• Any other IRAs in your name

You must exclude:

• Roth IRAs
• Employer plans (401k, 403b, ERISA plan)
• IRAs inherited from someone else (they are “inherited IRAs” and aggregate separately)
• IRAs held in your spouse’s name

Many people underestimate their aggregated balance because they forget about old SEP IRAs from self-employment years or IRAs held at different custodians.

The step-by-step calculation

Step 1: List all your traditional, SEP, and SIMPLE IRAs. Determine the account value on December 31st of the conversion year for each account. Include all account types.

Step 2: Separate pretax from nondeductible basis. For each account, determine how much is pretax (deductible contributions + all earnings) and how much is basis (nondeductible contributions you already paid tax on). Track basis using Form 8606 or the trustee’s cost-basis records.

Step 3: Sum pretax and nondeductible balances. Total pretax: $50,000. Total nondeductible basis: $8,000. Grand total: $58,000.

Step 4: Calculate the pro-rata percentage. Pretax as a share of the grand total: $50,000 ÷ $58,000 = 86.2%.

Step 5: Apply to the conversion. You convert $15,000. Taxable portion: $15,000 × 86.2% = $12,930. Nontaxable portion (your basis): $15,000 × 13.8% = $2,070.

You report $12,930 as taxable income on your 1040 and Schedule 1. You report the $2,070 as a nontaxable return of basis on Form 8606.

The ordering rule under pro-rata

Once you know the taxable and nontaxable portions, they are deemed to come out proportionally—you cannot direct which part of the conversion is “the basis.” If your basis is $8,000 of $58,000 total (13.8%), and you convert $15,000, then $2,070 is treated as basis and $12,930 is treated as pretax IRA dollars.

This applies to the conversion itself, not to the ongoing withdrawal ordering within the Roth. The Roth ordering rule determines whether you can later access conversions without penalty, but the pro-rata rule determines what is taxable in the year of the conversion.

Common mistake: forgetting the aggregation

A taxpayer with a traditional IRA ($60,000 pretax), a SEP IRA ($40,000 pretax), and $20,000 nondeductible basis elsewhere decides to convert $10,000. Many mistakenly think, “I am converting from the SEP, which is $40,000, so the portion I convert is $10,000 ÷ $40,000 = 25% basis-free.” Wrong. The aggregate is $100,000 pretax + $20,000 basis = $120,000. The pro-rata percentage is $20,000 ÷ $120,000 = 16.7%. So the conversion is 16.7% basis ($1,670) and 83.3% taxable ($8,330).

The IRS look-back date

The balance is measured as of December 31st of the year you convert. If you have a large IRA and want to do a Roth conversion, you might consider depleting a nondeductible IRA account before the year you convert (by Dec. 31st of the prior year) to reduce your aggregated balance. Conversely, contributions made up to the tax-filing deadline of April (for the prior year) do count toward the December 31st balance if made to an IRA for that prior year.

Nondeductible contributions and the form 8606

To track basis, file Form 8606 with your tax return whenever you make a nondeductible IRA contribution or convert a Roth. Form 8606 is cumulative—the IRS expects you to list total nondeductible contributions made to date. Failure to file 8606 can result in double taxation (the IRS assumes all conversions are taxable if you do not prove otherwise).

Interaction with employer plans

Employer plans (401(k), 403b, ERISA) do not aggregate with IRAs under the pro-rata rule. You could have a 401(k) with $500,000 pretax and a traditional IRA with $10,000 nondeductible basis, and convert the IRA. The pro-rata rule applies only to the IRA aggregate ($10,000), not the 401(k). However, if you roll a 401(k) into an IRA, the rolled amount is added to your IRA aggregate going forward.

Strategic timing and splitting conversions

Since the pro-rata rule uses December 31st balances, some taxpayers strategically time conversions. If you know you are receiving a large after-tax contribution to an IRA (perhaps a mega-backdoor Roth), you might do a Roth conversion before that contribution lands, reducing your aggregate. Conversely, you could delay a planned 401(k) rollover to an IRA until after a conversion, keeping the aggregate lower.

These strategies are legal, but the timings must be precise. The IRS may view certain transactions as coordinated and adjust if they appear to circumvent the pro-rata rule.

Example: a nondeductible withdrawal

The pro-rata rule also applies to nondeductible IRA withdrawals. If you have $40,000 pretax and $10,000 nondeductible basis, and you withdraw $5,000 to “access your basis,” the IRS applies the pro-rata rule: your basis as a share is $10,000 ÷ $50,000 = 20%. So the $5,000 withdrawal is 20% basis ($1,000, tax-free) and 80% pretax ($4,000, taxable). You cannot simply withdraw the basis.

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