Tax

Pro-Rata Rule

When you have pre-tax IRA dollars, a Roth conversion is taxed proportionally — you can't convert only the after-tax part.

The IRS treats all your traditional, SEP, and SIMPLE IRAs as one pool when you do a Roth conversion, so a “backdoor” conversion of after-tax dollars is partially taxable if you also hold pre-tax IRA money. A large rollover IRA can quietly make a backdoor Roth far more expensive than expected. Spotting the pre-tax balance before you convert is what keeps the strategy clean.

All your IRAs are one pool

When you convert IRA money to Roth, the IRS doesn't let you cherry-pick the after-tax dollars. The pro-rata rule aggregates all your traditional, SEP, and SIMPLE IRAs (Roth IRAs and workplace 401(k)s are excluded) and treats any conversion as coming proportionally from the pre-tax and after-tax slices of that combined pool. So the taxable share of a conversion is the pre-tax percentage across every IRA you own.

The rollover IRA that ruins a clean backdoor

This is what trips up the backdoor Roth. You make a $7,000 non-deductible contribution intending a tax-free conversion — but if you also hold a large pre-tax rollover IRA from an old 401(k), the rule makes most of that conversion taxable, because the pool is overwhelmingly pre-tax. The dollars you convert are deemed mostly pre-tax even though you contributed after-tax money.

How Formation handles it

Formation sees your IRA balances across every custodian, so the pre-tax balance that would make a conversion partly taxable is visible before you act — the exact thing that's invisible when each IRA lives in a separate login. The fix (often rolling pre-tax IRA money into a 401(k) first) is a move to run with your advisor; Formation makes the pool legible.

A worked example

You contribute $7,000 after-tax and also hold a $63,000 pre-tax rollover IRA. The combined $70,000 pool is 90% pre-tax, so 90% of your $7,000 conversion — $6,300 — is taxable. Only $700 converts tax-free, and the leftover after-tax basis lingers, complicating every future conversion.

Frequently asked

Which accounts count toward the pro-rata rule?

All traditional, SEP, and SIMPLE IRAs are aggregated. Roth IRAs, inherited IRAs, and employer plans like a 401(k) are not counted — which is why moving pre-tax IRA money into a 401(k) can sidestep the rule.

How do I avoid the pro-rata rule?

A common approach is to roll your pre-tax traditional, SEP, and SIMPLE IRA balances into an employer 401(k) (if the plan accepts roll-ins) before doing a backdoor conversion, leaving only after-tax dollars in IRAs so the conversion is clean.

In Formation

Backdoor Roth tracker with pro-rata warning

See this in your own numbers.

Formation organizes your whole household by entity and cites every figure to its source — the context that makes terms like this actionable.

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