The short answer
The pro rata rule says that when you convert part of a traditional IRA to a Roth IRA, the conversion is treated as coming proportionally from all of your pre-tax and after-tax IRA dollars, not just the after-tax ones. The taxable share depends on how much of your total IRA balance is after-tax.
What is the pro rata rule?
“Pro rata” means in proportion. When you convert money from a traditional IRA to a Roth IRA, you do not get to choose which dollars move. The IRS looks at all of your traditional IRAs together, including SEP and SIMPLE IRAs, and treats each conversion as a proportional slice of everything in them.
Think of your IRAs as one big smoothie. You cannot pour out only the strawberries.
“Pro rata rule” is the shorthand tax professionals use. The math itself is done on IRS Form 8606. What matters is your basis: the IRS defines basis in traditional IRAs as your nondeductible contributions and the nontaxable amounts you rolled in, minus your nontaxable distributions (see the Form 8606 instructions). Basis is money you already paid tax on, so it is not taxed again.
Why it matters: generally only the pre-tax part of a conversion is added to your income. If you have basis, the rule decides how much of the conversion escapes tax, and it may be less than you expected.
How the pro rata calculation works, step by step
- Add up your basis across all of your traditional IRAs. This is the after-tax money, tracked year to year on Form 8606.
- Add up the value of all of those IRAs on December 31 of the conversion year. The Form 8606 instructions ask for the total value of all your traditional IRAs as of that date.
- Add back what left the IRAs during the year. That means the amount you converted and any other withdrawals, since those dollars were part of your IRAs before they moved.
- Divide the basis by that total. The result is the share of your IRA dollars that are after-tax.
- Apply that share to the conversion. That part is generally not taxed. The rest is added to your income for the year.
Three details trip people up. First, the calculation uses the December 31 balance, not the balance on the day you convert. Second, every conversion in the same year is combined. Third, each person’s IRAs are counted separately, so a spouse’s IRAs are not added to yours.
The calculation is built from traditional, SEP, and SIMPLE IRAs. Roth IRAs and workplace plans such as a 401(k) are not part of it.
A hypothetical example
Hypothetical, for illustration only. The numbers below are made up and rounded. They are not a recommendation, they do not describe any client, and they assume no investment returns.
Say someone has $10,000 of after-tax basis, all sitting in one traditional IRA. They also have a $90,000 rollover IRA from an old job, which is all pre-tax. They convert the $10,000 IRA, hoping to move only the after-tax money.
| Total IRA value (year-end, plus conversion) | After-tax basis | After-tax share | Taxable part of the $10,000 conversion | |
|---|---|---|---|---|
| Only the $10,000 IRA | $10,000 | $10,000 | 100% | $0 |
| Also holding the $90,000 rollover IRA | $100,000 | $10,000 | 10% | $9,000 |
With the rollover IRA in the picture, only $1,000 of the conversion is tax-free and $9,000 is added to that year’s income. The other $9,000 of basis is not lost. It stays in the remaining IRA, and Form 8606 carries it forward for future years.
The table does not show tax owed, because that depends on filing status, other income, and the current IRS rate schedules at irs.gov.
Who runs into the pro rata rule?
- People who make nondeductible IRA contributions and then convert them, an approach often called a “backdoor Roth.” Roth IRA contributions have income limits that the IRS updates each year (see the IRS page on Roth IRAs). The catch: if you also hold pre-tax IRA money, the rule applies to the conversion.
- Self-employed people and business owners with a SEP or SIMPLE IRA. Those balances count toward the total. Our guide to small business 401(k) options covers how those plans compare.
- Retirees and near-retirees who rolled an old workplace plan into an IRA and also have after-tax money in another IRA.
- Anyone who made a nondeductible contribution years ago and has lost track of it. Form 8606 is the record, so older returns are worth checking.
Ways people approach it, and the trade-offs
These are options worth modeling, not recommendations. Each has a limit.
- Accept the split. Convert, pay tax on the taxable share, and keep tracking the remaining basis. The limit: you pay tax now, and you keep filing Form 8606 for as long as you have basis.
- Convert more of the pre-tax balance over time. This is the idea behind the multi-year approach in our Roth conversion strategy guide. The limit: more income in each conversion year, which can touch tax brackets, Medicare premiums, and Social Security taxation.
- Move pre-tax IRA money into an employer plan. The IRS says you can roll an IRA into a plan such as a 401(k) if the plan’s language allows it (see the IRS IRA FAQs). Because the calculation looks at IRAs, money held in a plan at year-end is not in it. The limit: the plan must accept the rollover, its investment choices and costs may differ, and timing matters.
- Skip the after-tax contribution step. A contribution that creates years of basis tracking may not be worth the trouble for every household.
Which one fits depends on your balances, your income, and your plans. A projection built on your actual tax return can show it, and a general guide cannot.
Common pro rata rule mistakes
- Assuming you can convert only the after-tax dollars.
- Looking at the balance on the conversion date instead of December 31.
- Leaving a SEP or SIMPLE IRA out of the total.
- Skipping Form 8606. The IRS says to file it if you converted an amount from a traditional IRA to a Roth IRA, and its instructions list penalties for not filing.
- Losing track of basis. The IRS tells you to keep records of your nondeductible contributions.
- Expecting to undo it. The IRS says conversions made in 2018 or later cannot be recharacterized back to a traditional IRA.
How a CFP® and an IRS Enrolled Agent look at it together
The pro rata rule sits where tax preparation and planning meet. The tax side asks what your Form 8606 history says and what a conversion would do to your return. The planning side asks how much income you need, and how a conversion fits with retirement planning and tax planning.
Our team includes Certified Financial Planners® and IRS Enrolled Agents, so those questions can be reviewed together. N Financial Plans is a fee-only, fiduciary firm, so we accept no commissions and sell no products. You can see how we are paid on our fees page.
If you already have an advisor and want another view before you convert, a complimentary financial second opinion is a low-pressure place to start.
Sources and as-of dates
Rules and thresholds change. Everything below was reviewed on October 29, 2026. Confirm current figures at the source before you act.
- IRS: Instructions for Form 8606 (2025 instructions: definition of basis, December 31 value of all traditional IRAs, who must file, no recharacterization of 2018 and later conversions)
- IRS: Retirement plans FAQs regarding IRAs (conversions, Form 8606, rolling an IRA into a workplace plan)
- IRS: Publication 590-A (conversions and the one-rollover-per-year limit)
- IRS: Publication 590-B (distributions that are partly taxable)
- IRS: Roth IRAs (contribution income limits)
This guide is educational. It is not individualized tax, legal, or investment advice, and it is not a recommendation that you convert. Any benefit of a conversion, such as tax-free qualified withdrawals, comes with limits such as an upfront tax cost, and results vary by household.
