The pro-rata rule is the #1 reason backdoor Roth strategies go wrong. It turns what you thought was a “tax-free” conversion into a surprise tax bill at filing time.
If you have any pre-tax money in traditional IRAs—including rollover IRAs from old 401(k)s—this rule applies to you. Understanding it before you convert saves thousands in unexpected taxes.
The good news: if you’re a business owner with access to a 401(k), you have a straightforward fix.
What is the pro-rata rule and how does it affect backdoor Roth conversions?
The pro-rata rule requires the IRS to treat all your traditional IRA money as one combined pool when you do a Roth conversion. If you have $93,000 in pre-tax IRA money and add $7,000 in non-deductible contributions for a backdoor Roth, only 7% of any conversion is tax-free—the rest is taxable. You can’t cherry-pick which dollars to convert. The rule applies to all Traditional, SEP, and SIMPLE IRAs you own (but not 401(k)s or Roth accounts). The workaround: roll your pre-tax IRA money into a 401(k) before converting, which removes it from the calculation.
Key Takeaways
- All IRAs are aggregated — The IRS treats your Traditional, SEP, and SIMPLE IRAs as one pool for conversion purposes
- December 31 balance matters — The calculation uses your year-end IRA balances, not the date you contribute or convert
- You can’t cherry-pick — Converting “just the non-deductible IRA” doesn’t work; the math is proportional
- 401(k)s are excluded — Pre-tax money in 401(k), 403(b), or 457 plans doesn’t affect the calculation
- The fix: roll to 401(k) — Moving pre-tax IRA money into your 401(k) removes it from the aggregation
- Spouse’s IRAs don’t count — Each spouse’s IRAs are calculated separately
Table of Contents
How the Pro-Rata Rule Works
When you convert ANY traditional IRA money to Roth, the IRS looks at ALL your traditional IRAs across all financial institutions. They don’t care that you have one IRA at Fidelity and another at Schwab—it’s all one pool for tax purposes.
The IRS Aggregation Principle
Accounts that count toward your pro-rata calculation:
- Traditional IRA
- Rollover IRA
- SEP IRA
- SIMPLE IRA
Accounts that don’t count:
- 401(k), 403(b), 457(b)
- Roth IRA
- Inherited IRAs (in most cases)
- Your spouse’s IRAs
The Formula
The IRS determines what percentage of your conversion is taxable using this formula:
Taxable Percentage = Total Pre-Tax IRA Balance / Total IRA Balance
Tax-Free Percentage = Total After-Tax (Non-Deductible) Balance / Total IRA Balance
This percentage applies to every conversion you make that year. You can’t convert “just the after-tax money.”
Why This Rule Exists
Congress designed the pro-rata rule to prevent a simple loophole. Without it, high earners could:
- Keep millions in pre-tax IRAs untouched
- Make non-deductible contributions each year
- Convert “just those contributions” tax-free
- Accumulate Roth wealth without ever paying tax on conversions
The pro-rata rule ensures that every conversion includes a proportional share of pre-tax money.
Pro-Rata Rule Example: The Math in Action
This is where most people get confused. Let’s walk through a realistic scenario step by step.
Scenario Setup
- You have a Rollover IRA from an old 401(k): $93,000 (all pre-tax)
- You contribute $7,000 to a new Traditional IRA (non-deductible, planning to do a backdoor Roth)
- Total IRA balance: $100,000
- You want to convert the $7,000 to Roth
You might think: “I’m just converting the $7,000 I just contributed. That was after-tax money, so it should be tax-free.”
The IRS says: “Nice try.”
Step-by-Step Calculation
Step 1: Calculate total IRA balance (December 31)
- Rollover IRA: $93,000
- Traditional IRA: $7,000
- Total: $100,000
Step 2: Calculate after-tax percentage
- After-tax (non-deductible): $7,000
- Percentage: $7,000 / $100,000 = 7%
Step 3: Apply to conversion
- You convert: $7,000
- Tax-free portion (7%): $490
- Taxable portion (93%): $6,510
Step 4: Calculate tax impact
- At 32% bracket: $6,510 × 32% = $2,083 in unexpected taxes
- At 37% bracket: $6,510 × 37% = $2,409
You thought the conversion would be tax-free. Instead, you owe $2,000+ in federal tax (plus state if applicable).
Visual Breakdown
| Component | Amount | Status |
|---|---|---|
| Pre-tax IRA (rollover) | $93,000 | Taxable when converted |
| After-tax IRA (new contribution) | $7,000 | Already taxed |
| Total IRA Balance | $100,000 | |
| Conversion Amount | $7,000 | |
| Tax-free (7%) | $490 | |
| Taxable (93%) | $6,510 | Ordinary income |
The December 31 Trap
Here’s what catches people: even if you contribute in January and convert in February, the calculation uses your December 31 balance of that year.
So if you:
- Contribute $7,000 in January 2026
- Convert $7,000 in February 2026
- Still have $93,000 in rollover IRA on December 31, 2026
The pro-rata math applies exactly as shown above. The timing of your contribution and conversion within the year doesn’t matter—only the year-end balance counts.
Implication: If you want a clean backdoor Roth in 2026, you need to clear your pre-tax IRAs by December 31, 2026.
How to Avoid the Pro-Rata Rule
Business owners have a significant advantage here: if you control your own 401(k) plan, you can solve this problem entirely.
Option 1: Roll Pre-Tax IRAs into Your 401(k)
This is the cleanest solution for business owners.
401(k) balances are excluded from the pro-rata calculation. By rolling your traditional/rollover/SEP IRA into your employer’s 401(k), you remove that money from “IRA land.”
For S-Corp and Partnership Owners:
- If you have a solo 401(k) or small business 401(k), roll your IRAs into it
- Solo 401(k)s at Fidelity, Schwab, and other providers typically accept IRA rollovers
- See our S-Corp retirement and 401(k) planning guide for setup details
Example:
- Before: $93,000 rollover IRA + $7,000 new contribution = 93% taxable on conversion
- Action: Roll $93,000 into solo 401(k)
- After: $0 pre-tax IRA + $7,000 new contribution = 0% taxable on conversion
- Backdoor Roth is now clean
This works because the IRS treats 401(k)s separately from IRAs. Your $93,000 doesn’t disappear—it’s still pre-tax, still subject to tax when you eventually withdraw—but it no longer pollutes your IRA conversion math.
Option 2: Convert Everything
If you can’t roll to a 401(k), consider converting your entire pre-tax IRA balance.
Yes, you’ll pay tax on all of it. But once it’s converted:
- All future backdoor Roth contributions are 100% tax-free
- You’ve created a clean slate going forward
- No more pro-rata calculations to worry about
When this makes sense:
- You’re in a temporarily low tax bracket (between businesses, post-sale, etc.)
- Your pre-tax IRA balance is manageable (say, under $100,000)
- You can pay the tax from non-retirement funds
- You have decades of tax-free Roth growth ahead
Option 3: Wait and Reassess
If neither option works right now, don’t force a backdoor Roth with bad pro-rata math.
A $7,000 contribution that’s 93% taxable on conversion isn’t worth doing. You’d pay $2,000+ in tax for a $7,000 Roth contribution—effectively a 30%+ “fee” to get money into Roth.
Better to skip the backdoor Roth until you can clear the pre-tax IRAs, then start fresh.
Option 4: Accept the Pro-Rata Math
Sometimes the math still works in your favor, even with pro-rata.
If you’re converting large amounts anyway and have decades of Roth growth ahead, the partial taxation might be acceptable. The long-term tax-free growth can outweigh the short-term tax cost.
Run the numbers for your specific situation. A $10,000 tax hit today might be worth it if it enables $500,000 of tax-free growth over 25 years.
Which Accounts Count (and Don’t Count)
Getting this wrong is expensive. Here’s the complete breakdown.
Included in Pro-Rata Calculation
| Account Type | Included? | Notes |
|---|---|---|
| Traditional IRA | ✅ Yes | All contributions and earnings |
| Rollover IRA | ✅ Yes | Treated same as Traditional |
| SEP IRA | ✅ Yes | Even employer contributions |
| SIMPLE IRA | ✅ Yes | After 2-year participation period |
Excluded from Pro-Rata Calculation
| Account Type | Included? | Notes |
|---|---|---|
| 401(k) | ❌ No | Including solo 401(k) |
| 403(b) | ❌ No | |
| 457(b) | ❌ No | |
| Roth IRA | ❌ No | Already after-tax |
| Roth 401(k) | ❌ No | |
| Inherited IRA | ❌ No | (with some exceptions) |
| Spouse’s IRAs | ❌ No | Each spouse calculated separately |
Key Insight for Business Owners
Your solo 401(k) or company 401(k) is your escape hatch. Roll pre-tax IRAs into it to clear the pro-rata problem.
This is why business owners with retirement plan control have an advantage over W-2 employees. An employee whose 401(k) doesn’t accept IRA rollovers is stuck with the pro-rata math. You can design your plan to accept rollovers and solve the problem.
Special Situations
SEP IRA Complications
If you’ve been making SEP IRA contributions as a self-employed business owner, all that money is pre-tax. It counts toward the pro-rata calculation.
Solutions:
- Roll the SEP IRA into a solo 401(k) (you can have both in the same year with coordination)
- Stop SEP contributions and switch entirely to solo 401(k) going forward
- Convert the entire SEP balance if the tax hit is manageable
See our solo 401(k) Roth contributions guide for setup options.
SIMPLE IRA 2-Year Rule
SIMPLE IRA contributions must “age” for 2 years before you can roll them to a 401(k) or convert without penalty.
If you roll out before the 2-year mark, you face a 25% penalty (not the usual 10%). Contributions made in 2024 can roll out in 2026.
Plan ahead: if you have a SIMPLE IRA and want clean backdoor Roth access, you need a 2-year runway.
Inherited IRAs
Inherited IRAs are generally NOT included in your pro-rata calculation—they’re treated separately.
Exception: If you inherit an IRA from your spouse and elect to treat it as your own (rather than keeping it as an inherited IRA), it becomes part of your IRA pool and counts toward pro-rata.
If you have inherited IRA situations, consult a CPA for guidance on your specific facts.
Multiple IRAs Across Institutions
It doesn’t matter if your IRAs are at different brokerages. Fidelity, Schwab, Vanguard, E*Trade—the IRS aggregates all of them.
You can’t “hide” pre-tax money at a different custodian to avoid pro-rata. The IRS sees your total IRA picture through Forms 5498 (contribution reporting) and 1099-R (distribution reporting).
Frequently Asked Questions
Does the pro-rata rule apply to 401(k) to Roth conversions?
No. The pro-rata rule only applies to IRA-to-Roth conversions. If you’re doing an in-plan Roth conversion within your 401(k), or rolling 401(k) directly to Roth IRA, the IRA pro-rata rule doesn’t apply. (401(k)s have their own rules for after-tax contributions, but that’s different from the IRA pro-rata calculation.)
Can I just convert the after-tax portion of my IRA?
No. This is the most common misconception. The IRS doesn’t let you cherry-pick which dollars you convert. Every conversion is treated as a proportional mix of pre-tax and after-tax money based on your total IRA balances.
Does my spouse’s IRA affect my pro-rata calculation?
No. Each spouse’s IRAs are calculated separately. Your spouse could have $500,000 in pre-tax IRAs and it wouldn’t affect your backdoor Roth—as long as YOUR IRAs are clean.
What if I roll my IRA to a 401(k) after I’ve already converted?
The calculation is based on your December 31 balance. If you roll to a 401(k) before year-end, that money is excluded from the calculation for conversions made earlier that year. Timing matters—work with a CPA to coordinate properly.
Does a SEP IRA count even if it’s from self-employment?
Yes. SEP IRA contributions are pre-tax regardless of whether you’re self-employed or an employee. They’re included in the pro-rata calculation just like any other traditional IRA.
How do I track my non-deductible IRA contributions?
File Form 8606 with your tax return each year you make non-deductible contributions. This form tracks your “basis” (already-taxed money) in non-deductible contributions. Keep these forms forever—you’ll need them to prove your after-tax amounts when you eventually withdraw.
What if I made non-deductible contributions years ago and didn’t file Form 8606?
You can file Form 8606 retroactively to establish your basis. Gather your records (contribution history, tax returns) and work with a CPA to reconstruct and file. Without this documentation, the IRS may assume all IRA money is pre-tax—meaning you’d pay tax twice on your after-tax contributions.
Is there a deadline for rolling my IRA to a 401(k) to avoid pro-rata?
The rollover must be complete by December 31 of the year you’re doing the conversion. If you convert in March and roll to 401(k) in November, the December 31 balance (with the rollover complete) is what counts. Don’t wait until the last week of December—allow time for the transfer to settle.
Clean Up Your IRAs
The pro-rata rule catches people off guard, but it’s solvable. Business owners with 401(k) access have the cleanest path: roll your pre-tax IRAs into the 401(k), then execute backdoor Roth contributions with 100% tax-free conversions.
Start by inventorying all your IRAs:
- List every Traditional, Rollover, SEP, and SIMPLE IRA you own
- Identify the pre-tax vs. after-tax (Form 8606) portions
- Calculate your current pro-rata percentage
- Decide on a solution (roll to 401(k), convert all, wait, or accept)
Not sure if pro-rata affects your backdoor Roth? Schedule a tax planning consultation and we’ll review your IRA situation, calculate your actual pro-rata percentage, and create a plan to optimize your conversions.
For a complete view of Roth strategies, see our backdoor Roth vs mega backdoor Roth guide and the Retirement Tax Planning Hub.
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