The Pro-Rata Rule, Explained

What the pro-rata rule is

The pro-rata rule is the IRS mechanism — codified in IRC §408(d)(2) — that determines how much of a Roth IRA conversion is taxable when a taxpayer holds both pre-tax and after-tax money across their IRA accounts. Under this rule, the IRS treats all of your traditional, SEP, and SIMPLE IRAs as a single aggregated pool, regardless of how many separate accounts you hold or at how many institutions. Roth IRAs and most inherited IRAs are excluded from this pool by law (IRS Publication 590-B).

The critical consequence: you cannot instruct the IRS to convert only the after-tax dollars. The taxable fraction of every conversion is calculated proportionally across the entire pool, not selectively from whichever account you choose to draw from. The IRS treats the IRA wrapper as a single ledger, not a collection of separately tracked tax lots.

Why the rule exists

Without the aggregation rule, a taxpayer holding both pre-tax and after-tax IRA balances could simply specify “convert only the after-tax contribution,” making every Roth conversion tax-free regardless of how much pre-tax money sat in other IRAs. The pro-rata rule closes that loophole: the IRS requires that the basis fraction of the entire pool be applied proportionally to every dollar converted.

The rule’s premise is that the IRA is a unified wrapper. The tax character of a distribution or conversion is determined by the overall composition of the pool — the ratio of after-tax basis to total value — not by which specific account or contribution you identify as the source.

The Form 8606 math, step by step

The pro-rata calculation is deterministic arithmetic. It mirrors the computation on IRS Form 8606 — the form you must file in any year you make a nondeductible IRA contribution or convert a traditional IRA to Roth. Three steps cover the full calculation (Form 8606 Part I, lines 5–6, and Part II, lines 8, 10, 11, 18):

Step 1 — Establish the pool (Form 8606 lines 5–6):
totalPool = afterTaxBasis + pretaxBalance

Step 2 — Compute the nontaxable fraction (Form 8606 line 10):
nontaxableFraction = afterTaxBasis ÷ totalPool

Step 3 — Apply the fraction to the conversion (Form 8606 lines 11, 18):
taxFreeAmount = nontaxableFraction × amountConverted
taxableAmount = amountConverted − taxFreeAmount

The taxable amount is always the remainder — never computed independently — so taxFreeAmount + taxableAmount equals amountConverted exactly, with no rounding drift between the two lines.

Worked example: the pro-rata trap

An investor above the Roth MAGI limit makes a $7,500 nondeductible contribution to a traditional IRA in 2026 — the 2026 contribution limit for taxpayers under age 50, per IRS Notice 2025-67 — and immediately converts $7,500 to a Roth IRA. They also hold $42,500 in a separate traditional IRA from an old 401(k) rollover that was never converted.

The IRS aggregates all traditional, SEP, and SIMPLE IRA balances. The $42,500 rollover is in the pool even though only the new $7,500 is being converted:

afterTaxBasis = $7,500
pretaxBalance = $42,500
totalPool = $50,000

nontaxableFraction = $7,500 ÷ $50,000 = 0.150 (15% of pool is after-tax basis)
taxableFraction = $42,500 ÷ $50,000 = 0.850 (85% of pool is pre-tax)

taxFreeAmount = 0.150 × $7,500 = $1,125.00 (Form 8606 line 11)
taxableAmount = $7,500 − $1,125.00 = $6,375.00 (Form 8606 line 18)
federalTaxOwed = $6,375.00 × 24% = $1,530.00 (labeled assumption)

Despite contributing only after-tax dollars to the traditional IRA, the investor owes ordinary income tax on $6,375 — approximately $1,530 at a 24% federal marginal rate. The $42,500 rollover balance, which the investor never intended to touch, determines the tax outcome of the conversion. This is the pro-rata trap: the IRS does not care which dollars the investor believes they are converting.

The clean backdoor — the $0 taxable case

When the pre-tax IRA balance is zero, the nontaxable fraction equals 1 and the entire conversion is tax-free. Using the same $7,500 contribution with no other traditional, SEP, or SIMPLE IRA balances:

afterTaxBasis = $7,500
pretaxBalance = $0
totalPool = $7,500

nontaxableFraction = $7,500 ÷ $7,500 = 1.000

taxFreeAmount = 1.000 × $7,500 = $7,500.00
taxableAmount = $7,500 − $7,500 = $0.00

With no pre-tax balance in the pool, 100% of the conversion is a tax-free return of after-tax basis. This is what the backdoor Roth strategy is designed to achieve — and it works only when the total pool is entirely basis.

What breaks the clean backdoor: any traditional, SEP, or SIMPLE IRA balance that contains pre-tax dollars — a prior deductible contribution, an employer-plan rollover that was never fully converted, or an active SEP or SIMPLE IRA from self-employment or a prior employer. Every pre-tax dollar in the pool reduces the nontaxable fraction and makes part of the conversion taxable.

The year-end balance: when the IRS takes the snapshot

The pro-rata calculation does not use the IRA balance at the moment of conversion. It uses the December 31 fair-market value of all traditional, SEP, and SIMPLE IRAs for the calendar year in which the conversion occurs — the amount entered on Form 8606, line 6 (IRS Form 8606 instructions).

Two important implications of the December 31 measurement date:

• A conversion executed in January still uses the December 31 balance of that same calendar year. An employer-plan rollover received into a traditional IRA in October — months after the January conversion — is included in the year-end pool and retroactively affects the nontaxable fraction for the conversion that occurred in January.
• Any strategy that removes pre-tax dollars from the aggregation pool must be complete by December 31 of the conversion year. Pre-tax funds moved on January 2 of the following year are too late: they remain in the December 31 snapshot and remain in the nontaxable-fraction denominator for the prior year’s conversion.

Form 8606 line 10 and the rounding note

The IRS Form 8606 instructions direct taxpayers to round the nontaxable fraction (line 10) to at least three decimal places before applying it to the conversion amount. A calculator that uses the exact (unrounded) fraction will produce a result a few dollars different from a hand-filled return rounded to three decimal places. This is a rounding-convention difference, not an error in either approach.

Concrete example — $20,000 pre-tax and $8,600 after-tax basis (the 2026 age-50+ IRA limit per IRS Notice 2025-67): totalPool = $28,600. The exact nontaxable fraction is $8,600 ÷ $28,600 = 0.30069930…

At 3-decimal rounding (Form 8606 hand-fill):
nontaxableFraction = 0.301
taxFreeAmount = 0.301 × $8,600 = $2,588.60
taxableAmount = $8,600 − $2,588.60 = $6,011.40

Exact (calculator result):
taxableAmount = $6,013.99

Difference: $2.59

Both results are legally correct. The $2.59 gap is a rounding-convention artifact — the form rounds the fraction before applying it; the calculator rounds only the dollar output. When comparing a calculator’s result to a completed Form 8606, a discrepancy of this magnitude at three-decimal rounding is expected and is not an error in either the calculator or the hand-filled form. At five decimal places of rounding (0.30070), the results converge to the cent.

2026 IRA contribution limits

Per IRS Notice 2025-67, the 2026 IRA contribution limits are:

• $7,500 for taxpayers under age 50.
• $8,600 for taxpayers age 50 and older (the $1,100 catch-up contribution included).

These limits apply to all IRA types — traditional and Roth — combined across all institutions. The right to make a nondeductible traditional IRA contribution is not income-limited; only the deductibility of the contribution is phased out at higher incomes. A high-earning taxpayer who cannot contribute directly to a Roth IRA and cannot deduct a traditional IRA contribution can still make a nondeductible traditional IRA contribution up to this limit — which is the first step of the backdoor strategy.

These figures are year-versioned: the IRS adjusts IRA contribution limits annually, typically in October or November. Verify the current year’s limits at irs.gov before contributing.

Common approaches to the pro-rata problem

Because the pro-rata rule applies to the entire aggregation pool, reducing the pre-tax portion of the pool to zero before the December 31 measurement date eliminates the taxable fraction. The following describes the rules and what taxpayers commonly do — not a recommendation for any individual situation.

Reverse rollover into an employer plan. The IRS excludes 401(k), 403(b), and governmental 457(b) employer-sponsored plan balances from the aggregation pool by statute (IRS Publication 590-B). Pre-tax traditional IRA funds rolled into an eligible employer plan before December 31 are therefore removed from the year-end pool and do not affect the nontaxable fraction for conversions made in that year. Whether a particular employer plan accepts incoming IRA rollovers is governed by the plan document — not all plans do, and this is a plan-specific determination.

No pre-tax IRA history. A taxpayer who has only ever made nondeductible traditional IRA contributions — with no deductible contributions and no employer-plan rollovers into a traditional IRA — holds a pool that is entirely after-tax basis. The pro-rata rule produces no taxable amount in this case, and successive conversions are clean. The pooling still applies (the IRS aggregates all traditional/SEP/SIMPLE IRA accounts), but if the entire pool is basis, the taxable fraction is zero.

Prior conversions that zeroed the pre-tax balance. If previous years’ conversions have reduced the pre-tax balance to zero, the pool is entirely after-tax basis for subsequent years. The remaining basis after each year’s conversion is tracked on Form 8606, line 14, and carried forward. Maintaining accurate Form 8606 records from year to year is essential — the IRS has no record of basis on which you fail to file, and undocumented basis may be taxed again at withdrawal.

In each case, the key variable is the December 31 balance of the pre-tax portion of all traditional, SEP, and SIMPLE IRA accounts — and whether that number is zero before the year-end snapshot. The paired calculator below computes the exact taxable and tax-free amounts for any combination of inputs, using the same Form 8606 line mapping described here.

Sources: IRS Form 8606 (2026) · IRS Publication 590-B · IRC §408(d)(2) (IRA aggregation rule) · IRS Notice 2025-67 (2026 IRA contribution limits)

This guide is for informational and educational purposes only. It is not financial, tax, or legal advice. Tax rules are complex, fact-specific, and subject to change. Consult a qualified tax or financial professional before making IRA contribution or conversion decisions.

Last reviewed: June 2026 · Against IRS Form 8606 (2026) and IRS Notice 2025-67.