Guide
The pro-rata rule
You cannot convert your after-tax money first. Every conversion carries the same pre-tax and after-tax mix as your total IRA balance — which is why one forgotten rollover can raise the tax on every conversion that follows.
By The Roth Ladder · Published
Written against published statutory sources. Not a CPA or financial adviser — every formula is documented so you can check it.
The rule
For the purpose of calculating tax on a conversion, all your Traditional, SEP, and SIMPLE IRAs are treated as a single account. Every dollar you convert carries the same proportion of pre-tax and after-tax money as that combined balance.
The consequence is the part that surprises people: if you have after-tax basis sitting in an IRA, you cannot elect to convert just that. There is no cherry-picking, and physically moving money from a specific account changes nothing.
The balance in that denominator is measured on December 31 of the conversion year, not on the day you convert. That timing detail is what makes the planning move at the end of this page work, and it is also what makes a late-year rollover so damaging.
A worked example
Someone with $40,000 of after-tax basis — non-deductible contributions made over the years — and $360,000 of pre-tax money across their IRAs, converting $50,000:
| Step | Amount |
|---|---|
| After-tax basis | $40,000 |
| Pre-tax balance | $360,000 |
| Total IRA balance on December 31 | $400,000 |
| Nontaxable share ($40,000 ÷ $400,000) | 10.0% |
| Conversion | $50,000 |
| Tax-free portion | $5,000 |
| Taxable income from the conversion | $45,000 |
So $50,000 converted produces $45,000 of taxable income, not $50,000 and not $10,000. The remaining basis — $35,000 — stays in the IRA and applies pro-rata to future conversions. Basis is consumed gradually, never all at once.
What is in the pot, and what is not
| Account | Counted? | Notes |
|---|---|---|
| Traditional IRA | Yes | Every one you own, at every custodian |
| SEP IRA | Yes | Aggregated even if still receiving employer contributions |
| SIMPLE IRA | Yes | Aggregated; separate two-year rule governs rollovers out |
| Rollover IRA | Yes | A Traditional IRA by another name |
| 401(k), 403(b), 457(b), TSP | No | Excluded while the money remains in the plan |
| Roth IRA | No | Not part of the calculation at all |
| Inherited IRA | No | Separate rules; cannot be converted |
| Your spouse's IRAs | No | The rule is per person, even on a joint return |
The mistake this rule creates
The 401(k) exclusion is where ladders go wrong, because the standard first step of a ladder is "roll the old 401(k) into a Traditional IRA." That is usually right — most plans will not convert in place. But if you also hold after-tax basis in an IRA, the rollover drops a large pre-tax balance into the denominator and dilutes your basis to near-irrelevance.
The same basis, before and after a rollover
$40,000 of basis against $100,000 of pre-tax IRA money makes 28.6% of each conversion tax-free. Roll in a $400,000 401(k) and the same basis now covers 7.4% of each conversion. Nothing about your basis changed — only the denominator did.
This bites hardest on the backdoor Roth. The strategy assumes a near-zero pre-tax IRA balance so the non-deductible contribution converts almost tax-free. Any pre-tax IRA money, including a rollover completed in the same calendar year, makes most of that conversion taxable.
Isolating basis, when the plan allows it
The rule runs in reverse too. Because employer plans are excluded from the aggregation, moving pre-tax money into a 401(k) removes it from the calculation:
- Confirm your current employer's plan accepts incoming rollovers from an IRA. Many do; some accept only pre-tax dollars, which is exactly what you want to move.
- Roll the pre-tax portion of your Traditional IRA into that plan, leaving the after-tax basis behind.
- Convert the remaining IRA balance, now almost entirely basis, at little or no tax cost.
- Complete all of it before December 31. The rule measures your year-end IRA balance, so a rollover finished on December 30 works and one finished on January 2 does not help that year.
Two caveats. Plan money is governed by plan rules — narrower investment options, and no access under the Rule of 55 if you have already separated from that employer. And this only helps if you actually have basis; with no after-tax money in your IRAs, there is nothing to isolate and the pro-rata rule is simply not a factor.
Form 8606, and why it matters years later
Basis is tracked on Form 8606, filed with your return for any year you make a non-deductible contribution or a conversion. It carries a cumulative figure forward, which means the form is the only record that your after-tax money is after-tax.
Missing years are common and expensive. Unreported basis is indistinguishable from pre-tax money at conversion time, so you pay income tax on dollars you already paid tax on when you earned them. If you have made non-deductible contributions without filing the form, reconstructing the history is worth a professional's time — this is one of the clearest cases on this site where a CPA pays for themselves.
Calculate your pro-rata tax and clearance strategies
Use the dedicated Backdoor Roth & Pro-Rata Calculator to aggregate your Traditional, SEP, and SIMPLE IRAs, calculate your Form 8606 taxable vs tax-free split, and simulate reverse rollover, lump-sum, and status-quo clearance strategies.
For multi-year early retirement planning, the Roth conversion ladder calculatortakes after-tax basis as an input and recovers it pro-rata across successive conversion rungs. The methodology page documents the basis recovery formula it uses.
Common questions
What is the pro-rata rule for Roth conversions?
The pro-rata rule requires every dollar you convert to carry the same mix of pre-tax and after-tax money as your total IRA balance. You cannot choose to convert only your after-tax basis. If 10% of your combined Traditional, SEP, and SIMPLE IRA balances is after-tax basis, then 10% of any conversion is tax-free and 90% is taxable income, no matter which account the money physically comes from.
Which accounts count toward the pro-rata rule?
All Traditional, SEP, and SIMPLE IRAs you own are aggregated and treated as one account, measured by their combined balance on December 31 of the conversion year. Roth IRAs are excluded. Employer plan balances such as a 401(k) or 403(b) are also excluded while they remain in the plan, which is what makes the isolation strategy possible. Your spouse’s IRAs are separate — the rule is per person, not per household.
Does a 401(k) count toward the pro-rata rule?
Not while the money stays in the 401(k). The aggregation covers IRAs only, so a large 401(k) balance does not dilute your IRA basis. This cuts both ways: rolling a 401(k) into a Traditional IRA before converting pulls that balance into the pro-rata calculation and can sharply increase the taxable share of every future conversion. Convert first, roll second, or do not roll at all.
How do you avoid the pro-rata rule?
If your employer plan accepts incoming rollovers, you can roll pre-tax IRA money into the 401(k), which removes it from the IRA aggregation and leaves only after-tax basis in the IRA to convert nearly tax-free. This has to be completed before December 31 of the conversion year, because the rule measures your year-end balance rather than the balance on the conversion date. Not every plan accepts rollovers, and some accept only pre-tax money.
What form reports Roth conversion basis?
IRS Form 8606, filed with your return for every year you have after-tax basis in a Traditional IRA or make a conversion. It tracks cumulative basis and computes the taxable portion of each conversion. Missing years of Form 8606 is a common problem, because unreported basis means you eventually pay tax twice on the same dollars — once when earned, once when converted.
Backdoor Roth & pro-rata calculator · Model a conversion ladder with basis · The ladder strategy · How basis recovery is computed