IRA Pro-Rata Aggregation Rule: Backdoor Roth Impact and Form 8606

The IRA pro-rata rule requires the IRS to treat every traditional, SEP, and SIMPLE IRA you own as a single account when you convert any portion to a Roth, so the tax on that conversion is split proportionally between your pre-tax and after-tax dollars.¹ You cannot pick out only your non-deductible contributions and convert those tax-free while leaving the pre-tax money behind. It doesn’t matter which account the money physically leaves; the IRS applies one ratio to the combined pool. This is what turns most backdoor Roth attempts into a partly taxable event when the person has other IRA money sitting around.

Which Accounts Get Combined

The statute is direct: for purposes of figuring tax on any IRA distribution or conversion, all your individual retirement plans are treated as one contract.¹ In practice that means every traditional IRA, SEP IRA, and SIMPLE IRA in your name, no matter where they’re custodied or when they were opened. At conversion time, the IRS sees one bucket.

Several account types stay outside that bucket:

Roth IRAs. The aggregation rule applies separately to Roth IRAs, so existing Roth balances never inflate the denominator.²
Employer plans. A 401(k), 403(b), or 457(b) sits under different code sections and is not part of IRA aggregation.
Your spouse’s IRAs. IRAs are individual. Even on a joint return, each spouse’s basis and balances go on a separate Form 8606.
Inherited IRAs. An IRA you inherited from someone else is not pooled with your own IRAs for pro-rata purposes.

The spousal and inherited-IRA exclusions matter. A couple where one spouse holds $500,000 in a rollover IRA and the other holds only $7,500 in non-deductible contributions might assume the big balance contaminates both conversions. It doesn’t. Each spouse’s pro-rata calculation stands on its own.

How the Formula Works

The math is simpler than it sounds. Divide your total after-tax basis (every non-deductible contribution you’ve made across all traditional, SEP, and SIMPLE IRAs) by the total value of those accounts. That percentage is the tax-free share of any conversion. The rest is taxable as ordinary income.

One wrinkle catches people. The statute says the value of the contract is increased by the amount of any distributions during the calendar year.¹ On Form 8606, you enter your December 31 IRA balance on one line and add back conversions and distributions taken during the year on the next.³ That rebuilds the full pool, so you can’t shrink the ratio by draining accounts before year-end.

A Worked Example

Say you own two traditional IRAs holding a combined $90,000 in pre-tax money, plus $10,000 in non-deductible contributions you made over the years. Your total pool is $100,000; your basis is $10,000. You convert $20,000 to a Roth.

The after-tax ratio is $10,000 ÷ $100,000, or 10 percent. Apply it to the $20,000 conversion: $2,000 comes out tax-free as basis, and $18,000 is taxable ordinary income. Your remaining basis drops to $8,000 for future years. The same 10 percent applies whichever account you pulled the money from, because the source doesn’t count.

Why This Rule Wrecks the Backdoor Roth

The backdoor Roth works like this: you contribute to a traditional IRA with no deduction, then convert those dollars to a Roth. Because you already paid tax on the contribution, the conversion should owe no additional tax. High earners above the Roth income limits use this to get money into a Roth indirectly. For 2026, the IRA contribution limit is $7,500, or $8,600 if you’re 50 or older.⁴

Pro-rata is what breaks it. Any pre-tax money in traditional, SEP, or SIMPLE IRAs gets pulled into the ratio. Imagine you already hold $92,500 in pre-tax IRA balances and make a fresh $7,500 non-deductible contribution. Your pool is $100,000 and your basis is only 7.5 percent of that. Converting $7,500 means just $562 comes out tax-free; the other $6,938 is taxable. The strategy still moves money into a Roth, but not the clean, tax-free move most people expect.

If you have zero pre-tax IRA money, the backdoor Roth works cleanly. The moment any pre-tax IRA balance exists, the math shifts against you.

Getting Around It With a Reverse Rollover

The standard workaround is to roll your pre-tax IRA money into an employer 401(k) before converting. Because 401(k) balances are not part of IRA aggregation, moving pre-tax dollars out of your IRAs leaves only the non-deductible basis behind. You can then convert that remaining balance to a Roth with little or no tax.

This only helps if your employer’s plan will accept the incoming rollover, which is not guaranteed. The IRS notes that plans are not required to accept rollover contributions, so check with the plan administrator first.⁵ Even plans that do accept them may restrict the types of money they’ll take or impose waiting periods.

The tradeoffs are real. Money inside a 401(k) is generally locked up until you leave the employer or reach retirement age, and most plans offer a narrower investment menu than an IRA. If clearing out your pre-tax IRA balances lets you run a clean backdoor Roth every year going forward, the long-term benefit usually outweighs those limits. Run the numbers with a tax advisor first, especially if your IRA mixes SEP contributions, rollover money, and non-deductible amounts.

Reporting the Conversion on Form 8606

Form 8606 is where the pro-rata calculation actually happens. It tracks your non-deductible contributions and works out the taxable portion of any conversion. You file it with your Form 1040 by the annual deadline, extensions included.³

Two numbers do most of the work:

Total basis. Your cumulative non-deductible contributions across all traditional IRAs over every prior year. Find it on line 14 of your most recent previously filed Form 8606, or reconstruct it from past returns if you never filed one.
Year-end IRA value. The fair market value of all your traditional, SEP, and SIMPLE IRAs as of December 31, plus any outstanding rollovers. Your custodian reports this on Form 5498 by January 31.³

You can convert as many times as you want in a single tax year. All of it lands on the same Form 8606, and the same ratio applies to the aggregate. There is no advantage to breaking a conversion into smaller pieces hoping one of them will be pure basis; the calculation combines them anyway.

The real risk in the paperwork isn’t the modest late-filing penalty. It’s losing your basis. If you can’t document your non-deductible contributions, the IRS can treat every dollar in your IRA as pre-tax and tax the entire conversion. Keep old Form 1040 pages, Forms 5498 showing contribution amounts, and prior Forms 8606 in one place so the basis you’ve built up is still there when you need it.

1
Office of the Law Revision Counsel. 26 U.S.C. 408 – Individual Retirement Accounts
2
Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs
3
Internal Revenue Service. Instructions for Form 8606 (2025)
4
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500
5
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions