The IRS pro rata rule requires every distribution or Roth conversion from a traditional IRA to be split proportionally between your after-tax basis and your pre-tax money. You don’t get to pick which dollars come out. The IRS treats all of your traditional IRAs as one combined pool, and each withdrawal carries the same ratio of taxable to tax-free money as the pool itself. This is the rule that surprises people attempting a backdoor Roth, and it’s the rule that decides how much tax you owe on any traditional IRA distribution that includes nondeductible contributions.
What the Rule Actually Calculates
Your traditional IRA holds two kinds of money. Basis is the after-tax portion: nondeductible contributions you made without claiming a deduction, plus any after-tax amounts rolled in from an employer plan.1Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs) Everything else is pre-tax: deductible contributions and all investment earnings. Pre-tax dollars are taxed as ordinary income when withdrawn. Basis comes back tax-free, because you already paid tax on it.
The pro rata rule decides the split. You divide your total nondeductible basis by the total value of all your traditional IRAs to get the non-taxable percentage, and that percentage applies to every dollar you take out or convert during the year:
Non-taxable percentage = Total nondeductible basis ÷ Total value of all traditional IRAs
The denominator isn’t just your December 31 balance. Form 8606 requires you to add three figures together: the combined December 31 value of all your traditional IRAs (plus any outstanding rollovers), any distributions you took during the year, and any amounts you converted to a Roth during the year.2Internal Revenue Service. Instructions for Form 8606 (2025) Adding distributions and conversions back prevents you from draining the account during the year to shrink the denominator and inflate the tax-free percentage.
A Worked Example
Say you’ve made $20,000 in total nondeductible contributions over the years and have never taken a distribution. Your traditional IRAs are worth $200,000 on December 31, and you convert $50,000 to a Roth during the year. The denominator is $200,000 plus $50,000, or $250,000. The non-taxable percentage is $20,000 ÷ $250,000, or 8%. Of the $50,000 conversion, $4,000 is a tax-free return of basis and $46,000 is taxable income.3Internal Revenue Service. Transcript for the Basics of Roth Conversions Retirement Planning
Your remaining basis after the conversion is $16,000. Next year, the calculation starts fresh with that figure.
A common assumption breaks here. People believe they can convert an IRA that holds only nondeductible contributions and pay no tax. They can’t. Even if the account being converted is 100% basis, the pro rata rule still applies across all your traditional IRAs combined. The IRS’s own example shows a taxpayer with a $10,000 nondeductible IRA and a $30,000 deductible IRA discovering that 75% of a conversion was taxable, because the combined accounts were 75% pre-tax money.3Internal Revenue Service. Transcript for the Basics of Roth Conversions Retirement Planning
Which Accounts Get Aggregated
The aggregation rule is what gives the pro rata calculation its bite. Spreading money across multiple accounts or brokerages doesn’t help; the IRS forces you to combine certain accounts as if they were one.
For Form 8606 purposes, “traditional IRA” means traditional IRAs, SEP IRAs, and SIMPLE IRAs. The December 31 value must reflect the combined balance of every one of these accounts you own, wherever they’re held.4Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs A SEP from a former self-employment gig counts. A SIMPLE from a previous job counts. You can’t leave any of them out.
What’s not aggregated matters just as much:
- Roth IRAs are reported separately on Form 8606 (Part III) and never appear in the traditional IRA denominator.4Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs
- Employer plan balances such as 401(k), 403(b), and 457(b) accounts are completely separate from the IRA aggregation rule.5Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans
- Inherited IRAs are not combined with your own IRAs. If the inherited account has basis, you file a separate Form 8606 for it.4Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs
The fact that employer plans sit outside the aggregation rule is the foundation of the main strategy for avoiding the pro rata problem.
Why This Wrecks a Backdoor Roth
The backdoor Roth is a two-step move: contribute to a traditional IRA on a nondeductible basis (because your income is too high to deduct it), then convert that money to a Roth. If you have no other traditional IRA balances, the math works cleanly. You contribute $7,500 (the 2026 limit), convert $7,500, and owe little or no tax because nearly the entire amount is basis.6Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
Add pre-existing traditional IRA money and the strategy collapses. Contribute $7,500 into a system that already holds $292,500 in pre-tax dollars and your combined balance is $300,000 with only $7,500 in basis. The non-taxable percentage is 2.5%. Convert $7,500 and only about $188 comes over tax-free. The other $7,312 is taxable. You’ve gained almost nothing.
Strategies to Reduce the Tax Hit
To get a clean conversion, you need to reduce your traditional IRA balance to zero or close to it before you convert. Two approaches work.
Roll Pre-Tax IRA Money Into an Employer Plan
Because employer plans sit outside the IRA aggregation rule, you can roll the pre-tax portion of your traditional IRA into your current employer’s 401(k) if the plan accepts incoming rollovers.7Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Once that money is inside the 401(k), it no longer counts in the pro rata denominator. What’s left in the traditional IRA is just your basis, and converting it to a Roth costs little or no tax.
Not every plan accepts rollovers from IRAs, and some that do have high fees or thin investment menus. Check your plan documents or ask HR before you count on this.
Convert Everything and Pay the Tax
The other route is converting your entire traditional IRA balance to a Roth in one or more years and paying the tax as it comes due. This ends the pro rata problem for good because there’s no traditional IRA balance left to aggregate. The tax bill in the conversion year can be large. If you have decades of tax-free growth ahead of you, the math often still favors doing it, but pay the tax from a separate account so the full converted amount lands in the Roth.
Tracking Basis on Form 8606
Basis exists only if you can prove it. The IRS doesn’t keep a running tally of your nondeductible contributions; that’s on you. Form 8606 is the record.
File Form 8606 for any year you make a nondeductible contribution, even if you take no distributions that year. That filing establishes the basis.8Internal Revenue Service. About Form 8606, Nondeductible IRAs Skip it and the IRS has no evidence the contribution was nondeductible. File it again for any year you take a distribution or convert money from a traditional IRA that contains basis; that’s where the pro rata math actually happens on the return.2Internal Revenue Service. Instructions for Form 8606 (2025)
If you missed the filing in a prior year, you can file Form 8606 retroactively by attaching it to an amended return (Form 1040-X) for each year you missed.4Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs The direct penalty for missing the form is small, but the underlying cost is not. Without a documented basis, the IRS treats every dollar you eventually withdraw as pre-tax. You pay income tax twice on money you already paid tax on once, and on a $50,000 distribution that mistake can cost thousands. Keep copies of every Form 8606, along with Form 5498 and Form 1099-R, until every dollar has left your IRAs.
A Note on Inherited IRAs
If you inherit a traditional IRA that contains nondeductible basis, that basis carries over to you and you’re entitled to receive that portion of distributions tax-free. Report it on a separate Form 8606 from the one you file for your own IRAs.4Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs The practical problem is documentation: if the original owner didn’t file Form 8606 consistently, proving the basis exists can be difficult. Gather every 8606 and 5498 you can find from their records before the paper trail disappears.