A Guide to the Pro-Rata Rule and Roth IRAs

Roth individual retirement accounts (IRAs) can be a powerful tool in a retirement savings strategy. Contributions to Roth IRAs are limited by income, but there is a way to skirt these rules through so-called Roth conversions. However, many account holders are unaware that Roth conversions can trigger a complicated tax bill because of a little-known regulation called the pro-rata rule. Here’s a guide on how that works.

A financial advisor could help you plan for retirement and help you determine if a Roth conversion is the best option for you.

What Is a Roth IRA?

Roth IRAs are tax-advantaged retirement accounts that allow you to grow after-tax money and withdraw it tax-free during retirement. As a result, they are subject to specific rules that govern tax-free withdrawals.

Roth IRAs restrict contributions to earners who make less than a certain income. In 2025, the limit for married couples filing joint taxes is between $236,000 and $246,000 (individuals phase out between $150,000 and $165,000 ¹ .

What Is a Backdoor Roth or Roth IRA Conversion?

High earners who want more tax-free income in retirement often look to Roth conversions, but it’s important to distinguish between two related strategies: standard Roth conversions and backdoor Roth contributions.

A standard Roth conversion involves moving pre-tax funds from a traditional IRA into a Roth IRA and paying ordinary income tax on the amount converted. This strategy is available at any income level and is typically used to shift assets into a tax-free account when current tax rates are expected to be lower than future rates.

A backdoor Roth contribution, by contrast, is designed specifically for people who exceed the income limits for direct Roth IRA contributions. It begins with making non-deductible, after-tax contributions to a traditional IRA, followed by a conversion to a Roth IRA. Because the contributions were already taxed, only any investment growth is subject to tax at conversion, subject to the IRS pro-rata rule.

However, many fail to consider the tax implications that such a process can trigger.

Roth IRAs are funded using after-tax dollars, so many assume that moving tax-deferred money to a Roth IRA means you will pay taxes on the amount to be converted and that’s it. Unfortunately, that’s only true if you have never contributed non-deductible, or after-tax, money to a traditional IRA.

If you have ever topped up your traditional IRA outside of a 401(k) rollover, your conversion tax bill may be more complicated than you think.

What Is the Pro-Rata Rule?

The pro-rata rule is used to determine how tax-deferred money should be taxed upon withdrawal. Since a backdoor Roth conversion involves transferring funds in a traditional IRA to a Roth IRA, the pro-rata rule applies.

If you have never contributed after-tax money to a traditional IRA, the total amount you convert to a Roth IRA will be taxed at your normal income tax rate. The process is relatively straightforward. However, if your traditional IRA contains both pre-tax (deductible) and after-tax (non-deductible) contributions, the pro-rata rule dictates that your Roth conversion will be taxed proportionate to your pre- and post-tax percentages.

To prevent people from skirting the Roth income limit and manipulating funds to lower their tax bill, you are not allowed to choose which funds you convert.

How Do You Calculate Your Taxable Percentage With the Pro-Rata Rule?

When converting funds from a traditional IRA to a Roth IRA, the IRS applies the pro-rata rule, which prevents you from converting only after-tax dollars. All of your non-Roth IRAs are treated as a single combined account for tax purposes. This means every Roth conversion contains a proportional mix of pre-tax and after-tax money, regardless of which specific IRA the funds come from.

The IRS determines the taxable portion of a conversion using this formula:

(Total after-tax contributions across all traditional IRAs ÷ Total value of all traditional IRAs) × Amount converted = Non-taxable portion

The remainder of the conversion is treated as taxable income.

For example, assume you have $100,000 across all your traditional IRAs, and $7,000 of that total represents non-deductible (after-tax) contributions. Your after-tax percentage is 7%. If you convert $7,000 to a Roth IRA, only 7% of that conversion is non-taxable:

• $7,000 × 7% = $490 (non-taxable)
• $7,000 − $490 = $6,510 (taxable)

This is why the common assumption — that you can convert only your after-tax contributions without triggering taxes — is incorrect. Unless your traditional IRA balance consists entirely of after-tax funds, most Roth conversions will generate taxable income. This rule is especially important for backdoor Roth strategies, where overlooking the pro-rata calculation can lead to unexpected tax bills.

In other words, 7% of the $100,000 is non-taxable since you already paid taxes on those $7,000. But if you want to convert $7,000 to a Roth IRA, in reality, the converted amount comes from 93% pre-tax funds and only 7% after-tax funds. You’ll have to pay taxes on 93%, or $6,510, of the converted amount.

By the same token, that means $6,510 of the original non-deductible $7,000 is still in the traditional IRA, and any future after-tax contributions to your non-Roth IRAs will further complicate your pro-rata percentage, making future withdrawals messier than you might assume.

How to Avoid the Pro Rata Rule

The pro rata rule is a tax principle that can complicate converting a traditional IRA to a Roth IRA. This rule requires you to consider all your IRA accounts as a single entity when calculating taxes owed on a conversion. Essentially, if you have both pre-tax and after-tax contributions in your IRAs, the pro rata rule mandates that any conversion must include a proportional amount of both. This can lead to unexpected tax liabilities if not properly managed.

One effective strategy to avoid the complications of the pro-rata rule is to maintain separate accounts for pre-tax and after-tax contributions. Keeping these funds in distinct accounts, you can more easily manage IRA conversions and minimize tax implications. For example, rolling over pre-tax funds into a 401(k) plan, if your employer allows it, can isolate your after-tax contributions in an IRA, simplifying the conversion process to a Roth IRA.

Given the complexities involved with the pro rata rule, consulting a financial advisor can be invaluable. A professional can provide personalized advice tailored to your financial situation, helping you navigate the intricacies of IRA conversions.

Tax Planning Strategies for Roth Conversions

The timing of a Roth conversion can make a significant difference in how much tax you ultimately pay. Converting in years when your income is lower may help reduce the tax impact because the conversion amount is taxed at your ordinary income rate. Some retirees, for example, choose to convert after they stop working but before required minimum distributions begin, taking advantage of years when taxable income is relatively low  and ultimately avoiding RMDs from their traditional IRA.

Spreading out conversions over several years can also help limit the tax burden. Converting a large sum all at once could push you into a higher tax bracket, while smaller, staged conversions allow you to manage taxable income more efficiently. This gradual approach can also make it easier to plan for estimated tax payments and cash flow needs during retirement.

It is also important to consider how a conversion interacts with other parts of your financial plan. A large conversion may affect the taxation of Social Security benefits or increase Medicare premiums through income-related monthly adjustment amounts. Coordinating your conversion strategy with other withdrawals can help avoid unintended tax consequences.

Finally, Roth conversions can provide long-term flexibility for estate planning. Paying taxes up front allows heirs to inherit funds that can grow tax-free. By carefully choosing when and how much to convert, you may be able to reduce your lifetime tax liability while also leaving beneficiaries with a more efficient asset. These benefits are strongest when conversions are aligned with overall income planning.

Bottom Line

Backdoor Roth conversions are subject to the pro-rata rule, which dictates how non-Roth IRA funds are taxed at withdrawal. Some investors believe that they can contribute after-tax money to a traditional IRA and then convert the funds to a Roth IRA to avoid income limits and benefit from tax-free growth. If their traditional IRA contains any pre-tax funds, the pro-rata rule requires them to calculate their taxable contribution percentage and pay a proportionate amount upon withdrawal. This can complicate matters and may result in an unexpected tax bill.

This is where documentation and account aggregation become decisive factors in avoiding mistakes.

“If you make any non-deductible (aka after-tax) contributions to a traditional IRA, track them carefully on IRS Form 8606 so you have proof that you’ve paid taxes on the original contributions. When it comes to applying the pro-rata rule formula, always include the value of all non-Roth IRA accounts, including SEP IRAs and SIMPLE IRAs, even if you’re not withdrawing funds from those accounts — failing to do this will make your calculations inaccurate,” said Tanza Loudenback, CFP®.

Tanza Loudenback, Certified Financial Planner™ (CFP®), provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and are not intended to provide specific advice or recommendations.

Retirement Planning Tips

• Not sure if a Roth conversion can help you save more for retirement? Consider speaking with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Use SmartAsset’s free retirement calculator to get a good first estimate of how much money you’ll need to retire.

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