The Pro-Rata Rule — How It Affects Roth Conversions

A separate IRA is not a separate tax calculation. The pro-rata rule generally combines your own non-Roth IRAs, including traditional SEP and traditional SIMPLE IRAs, when allocating after-tax basis to a Roth conversion. Basis means money already taxed and not yet recovered. Form 8606 uses an annual calculation, not the label on the account you convert from. For example, with $10,000 of documented prior-year basis, a $10,000 conversion, $100,000 left in your counted IRAs on December 31 and no other relevant transactions, $909.09 is nontaxable and $9,090.91 is taxable. The $10,000 basis is not a proposed new annual contribution.

The Aggregation Rule: How the IRS Pools Your IRAs

IRC §408(d)(2) generally combines the owner's non-Roth IRAs and the year's relevant distributions. Form 8606 implements that annual calculation. Moving basis to a separate Traditional IRA at another institution does not make it available for a basis-only conversion.

Ownership and tax type matter. In this guide, your non-Roth pool means your own Traditional IRAs, including traditional SEP and traditional SIMPLE IRAs. It excludes Roth variants, accounts kept separately as inherited, and balances still in workplace plans. Each spouse has a separate own-account pool, even on a joint return.

For example, three of your own Traditional IRAs holding $50,000, $30,000 and $20,000 on December 31 contribute $100,000 to the year-end value. That alone is not the full denominator: relevant same-year distributions and net conversions generally must be added. Documented basis determines the nontaxable fraction; the account names do not.

The Pro-Rata Formula: How Your Tax Bill Is Calculated

For an ordinary conversion involving basis, the simplified calculation is:

Example assumptions: The 2026 examples with a new $7,500 contribution assume an eligible saver under 50, sufficient IRA compensation, unused regular contribution room and a fully nondeductible contribution made in 2026 for 2026. Unless stated otherwise, there are no gains, losses, other distributions, other conversions, outstanding rollovers or special repayments.

Suppose you have $93,000 of pretax IRA money, add $7,500 of nondeductible basis and convert $7,500. If $93,000 remains in the counted IRA pool on December 31 and there are no other relevant transactions, the annual denominator is $93,000 + $7,500 = $100,500.

The calculation: ($7,500 ÷ $100,500) × $7,500 = $559.70 nontaxable. The other $6,940.30 is taxable. These examples use the full-precision ratio and round the result to the nearest cent; a filed Form 8606 follows its line-specific decimal and whole-dollar rounding instructions.

The key point is that a taxpayer cannot designate the conversion as coming only from the recent nondeductible contribution while leaving pretax IRA money outside the calculation. Form 8606 allocates available basis across the owner's own non-Roth IRA pool. Contributions made after year-end for the prior tax year do not enter that prior year's conversion fraction; the form subtracts them when calculating available basis.

Use the actual form for filing. Its ratio is rounded to at least three decimal places and capped at 1.000. Outstanding rollovers, certain repayments, excluded distributions and special computations can change the simple denominator. These examples are not instructions for every Form 8606 situation.

The December 31 Rule: Why Timing Matters

The important timing point is simple: the conversion-date balance does not freeze the result. Form 8606 generally builds one annual denominator from the December 31 value of your own non-Roth IRAs plus relevant same-year distributions and net conversions, with required adjustments.

Example: You have $100,000 in a Traditional IRA in November. You make a $7,500 nondeductible IRA contribution on December 15, then convert $7,500 on December 20.

It does not work as a basis-only conversion. After the conversion, $100,000 remains in the counted IRA pool on December 31; Form 8606 then adds the $7,500 conversion, producing a $107,500 denominator. The full-precision ratio makes $523.26 nontaxable and $6,976.74 taxable—6.9767% basis and 93.0233% pretax.

An inbound rollover can change an earlier conversion too. If you convert in January and later roll $100,000 from a workplace plan into a Traditional IRA that remains there on December 31, that year-end balance enters the annual denominator. Conversely, eligible pretax IRA money accepted by an employer plan can leave the IRA pool even if the Roth conversion happened earlier. Our simple direct-rollover examples use completion by year-end. Rollovers that cross year-end need the form's specific treatment, explained under conditional cleanup below.

Form 8606: Tracking Your Non-Deductible Basis

For backdoor-Roth purposes, Form 8606 is generally required for a year in which you make a nondeductible traditional IRA contribution, convert traditional IRA money to Roth, or receive a traditional IRA distribution while you have basis. The instructions list additional events, including certain Roth IRA distributions. Basis that merely carries through an otherwise inactive year does not by itself require a new form.

Form 8606 has three parts. Part I reports nondeductible traditional IRA contributions, tracks traditional-IRA basis, and calculates the nontaxable share of distributions and conversions under the pro-rata rule. Part II reports traditional-IRA-to-Roth conversions and their taxable amount. Part III is for Roth IRA distributions.

When Part I applies, it uses prior basis, current nondeductible contributions, the counted year-end value, relevant distributions and the conversion, with its required adjustments. Part II reports the conversion and its nontaxable share. Follow the form's routing instructions: a full conversion of all Traditional IRA amounts with basis can take a different path from the partial-conversion examples here.

File Form 8606 whenever its instructions require it, even when a conversion's resulting taxable amount is zero. Keep each filed form and its supporting records so line 14 basis can be carried to line 2 the next time Part I applies.

Which IRAs Count in the Aggregation?

Included: your own Traditional IRAs, traditional SEP IRAs and traditional SIMPLE IRAs, including inactive accounts. A traditional SIMPLE IRA counts even during its initial two-year participation period; that period limits transfer destinations, not inclusion in the pool.

Not included in your own non-Roth pool: your Roth IRAs, including Roth SEP and Roth SIMPLE IRAs; IRAs maintained separately as beneficiary accounts; and your spouse's own IRAs. Prior-year conversion money already in a Roth IRA is not a current-year Traditional-side balance or conversion.

Employer plans that are NOT included: 401(k), 403(b), SIMPLE 401(k), Solo 401(k), Profit-Sharing Plan, Defined Benefit Plan, or any other qualified employer plan. If your employer 401(k) holds $500,000, that balance does not enter the IRA pro-rata calculation. Moving IRA money into a plan is separate: the plan must accept the exact IRA source, and only eligible pretax money can move.

Why This Matters for Backdoor Roth Conversions

After compensation, shared IRA room and direct Roth eligibility are checked, the pro-rata rule determines how much of a Traditional-IRA-to-Roth conversion is allocated to basis under these simplified facts.

For example, a saver whose Roth MAGI is above the direct-contribution band might make an eligible $7,500 nondeductible Traditional IRA contribution and convert $7,500. If substantiated basis equals the annual denominator, the conversion has no taxable portion. Other distributions, conversions, gains, losses or counted IRA balances can change the result.

But if $100,000 remains in the counted IRA pool on December 31, the same $7,500 conversion is different: $523.26 is nontaxable and $6,976.74 is taxable. If that entire taxable portion is subject to an illustrative 22% federal rate, multiplying it by 22% gives $1,534.88. That is not a calculation of the saver’s full return, state tax or other income-related effects.

This is why the pro-rata rule deserves a full owner-wide inventory. An old non-Roth rollover, traditional SEP or traditional SIMPLE IRA that remains in the counted pool on December 31 can make an earlier conversion partly taxable; the conversion date alone does not settle the result.

The December 31 Trap: A Real-World Example

Here's a scenario that catches even sophisticated planners off guard:

The Setup: It's mid-November. Jennifer has $100,000 in a Traditional IRA. She wants to do a backdoor Roth for $7,500. She plans to contribute the $7,500 non-deductible on December 15, then convert it on December 20.

What she thinks: "I'll add $7,500 to my IRA, making it $107,500. Then I'll convert $7,500, leaving $100,000. The conversion will be fully non-taxable because I'm converting only the non-deductible portion I just added."

What Form 8606 does: On December 31, Jennifer has $100,000 remaining in her Traditional IRA after the conversion. Part I then adds that year-end value to her $7,500 conversion when building the denominator: $100,000 + $7,500 = $107,500.

Her full-precision basis percentage is $7,500 ÷ $107,500 = 6.9767%. Applied to the $7,500 conversion, $523.26 is nontaxable and $6,976.74 is taxable when rounded to cents. The denominator happens to equal her pre-conversion balance in this simple example, but it comes from the annual Form 8606 lines—not a snapshot taken on December 20.

The distinction matters when the balance changes later. If Jennifer converted in July and then finished the year with $110,000 in counted IRAs, Form 8606 would generally combine that $110,000 December 31 value with the $7,500 conversion and any other relevant distributions. It would not reuse the July balance or calculate each conversion from a separate transaction-date ratio.

Before You Do a Backdoor Roth: Your Checklist

If you're planning a backdoor Roth conversion, use this checklist to avoid the pro-rata trap:

The Conditional Cleanup: Moving Eligible Pretax IRA Money Into an Employer Plan

One possible way to reduce the year-end IRA pool is a direct roll-in of eligible pretax IRA money to the same owner's employer plan. It is not automatic and is not available under every plan.

How it works: An accepting eligible employer plan may receive the otherwise taxable portion of an eligible IRA rollover. IRA basis cannot be rolled into the plan. The special IRA-to-plan rule treats the rollover as otherwise taxable money first when the amount left in IRAs or not rolled into the plan is at least equal to the basis. That is different from trying to select basis for a Roth conversion. A qualifying completed rollover leaves the own non-Roth IRA pool used by Form 8606.

The catch: The receiving plan is not required to accept IRA-origin money. Confirm that it accepts the exact source, not merely plan-to-plan rollovers. Traditional SIMPLE IRA money can also face its initial two-year transfer restriction.

Timing: Money still in an IRA on December 31 normally enters line 6. A direct IRA-to-plan rollover completed before year-end gives the straightforward result shown here and can follow an earlier conversion. But December 31 is not a universal plan-receipt deadline: the 2025 Form 8606 instructions exclude a qualifying outstanding IRA-to-plan rollover from line 6, unlike an outstanding IRA-to-IRA rollover. That requires a distribution in the conversion year and a valid rollover completed under its applicable rules. A new distribution made in January does not remove money that was still in the IRA on the prior December 31. Do not confuse a rollover request with a distribution or a valid completed rollover.

Future Roth conversion: Employer-plan money does not have to return to a Traditional IRA first. Depending on plan terms and distribution eligibility, pretax plan money may be converted through an in-plan Roth rollover or moved directly to a Roth IRA; either route generally creates taxable income. If that money instead enters your own non-Roth IRA, it becomes part of the IRA accounting rather than staying outside it as a plan balance.

How to File Form 8606 for Your Conversion

Edition note: The line references here follow the IRS's available 2025 Form 8606 and its instructions, checked October 3, 2026. The contribution amounts in our worked examples are for 2026. Use the appropriate tax-year form and instructions when filing.

Form 8606 is required for every traditional-IRA-to-Roth conversion. It is also generally required when you make a nondeductible traditional IRA contribution, take a traditional IRA distribution while you have basis, or receive certain Roth IRA distributions. Carrying basis through an otherwise inactive year does not itself require a new form.

What you'll need: Your documented basis, contribution dates and tax-year designations, the counted December 31 value across your own non-Roth IRAs, and the year's relevant distributions, conversions, rollovers and any special repayments.

The ordinary Part I calculation: Line 1 reports current-year nondeductible contributions and line 2 carries prior basis. Line 4 removes contributions made after year-end for that prior tax year from the available basis on line 5. Line 6 starts with counted year-end value and outstanding rollovers, subject to its adjustments; line 7 includes relevant distributions, excluding such items as qualifying rollovers and QCDs; line 8 reports net conversions. Line 9 adds lines 6–8. Line 10 divides line 5 by line 9, rounded to at least three decimals and capped at 1.000. Lines 11–14 allocate and carry basis; Part II lines 16–18 report the conversion and its taxable amount. Special computations and the form's routing instructions can change which lines apply.

Filing: Attach Form 8606 to Form 1040 when the instructions require it. The taxable conversion amount is included in income for that year. Keep the prior basis forms, transaction confirmations and year-end statements together so the annual calculation can be supported.

Inherited IRAs: Are You the Owner or the Beneficiary?

An IRA kept as a beneficiary account stays separate from your own IRAs. Publication 590-B's “IRA with basis” section expressly preserves that separation unless a surviving spouse chooses own-account treatment. This is not just a nonspouse rule. A surviving spouse can keep an IRA inherited rather than make it their own.

For example, a $500,000 Traditional IRA inherited from a parent does not enter your own conversion calculation while it remains a properly maintained beneficiary account. A separate $7,500 conversion could still be fully allocated to your own $7,500 of available basis under otherwise-clean facts. The inherited account's distributions, basis and beneficiary deadlines need separate attention; not every inheritance follows the same withdrawal schedule.

Inherited basis does not disappear. The decedent's documented unrecovered basis stays with the inherited Traditional IRA. Unless a spouse validly makes the account their own, it cannot be combined with basis in the beneficiary's own IRAs or IRAs inherited from a different person. When distributions from both separate pools involve basis, separate Forms 8606 are required. A reportable withdrawal can generate Form 1099-R; merely holding an inherited account does not promise a withdrawal form every year. Missing prior Forms 8606 call for record reconstruction, not an automatic assumption of zero basis.

A spouse's choice changes a Traditional account, not its Roth counterpart. If a spouse validly treats an inherited Traditional IRA as their own or rolls it into their own Traditional IRA, that value and basis join the spouse's own non-Roth pool. If the spouse keeps it inherited, the separation remains. A Roth IRA, including one validly made the spouse's own, does not enter the Traditional-side pro-rata pool. Beneficiary status, withdrawal timing and own-account eligibility are separate questions; this guide does not select a spouse's personal option.

Roth IRAs Have Their Own Aggregation Rule—Different from Traditional Pro-Rata

It's a common misconception that "IRAs are aggregated." In reality, Traditional-side aggregation (for conversion pro-rata) operates under IRC §408(d)(2), while Roth-side aggregation (for withdrawal ordering) operates under IRC §408A(d)(4). They are separate statutory rules, and balances from one side don't cross over.

Your existing Roth IRA balance does not enter the Traditional-side pro-rata ratio. For example, a $500,000 own Roth IRA would not change the ratio for a separate $7,500 Traditional IRA contribution and conversion. With $7,500 of available documented basis, no other relevant transactions, and a $0 conversion-year December 31 value across your own non-Roth IRAs, the conversion can be fully allocated to basis. Gains or other counted IRA amounts can change that result.

Your own Roth IRAs are grouped for nonqualified-withdrawal ordering, but workplace Roth rollovers need a separate distinction. Under the designated Roth rollover rules, contract basis enters the first contribution layer and the remainder is earnings; a qualified source distribution enters the first layer in full. It is not all placed in the conversion layer. Our Rules overview explains the layers and applicable in-plan recapture. The Roth IRA qualification period remains separate from the workplace plan's clock, and conversion years have their own potential early-withdrawal recapture periods. See the 5-Year Rule guide.

Notice 2014-54: Splitting a Plan Distribution by Tax Character

IRS Notice 2014-54 explains how eligible plan disbursements scheduled at the same time are treated as one distribution when allocating pretax and after-tax amounts. When its requirements are met, the participant can allocate pretax money to a Traditional IRA and after-tax contribution money to a Roth IRA. It is not permission to select only after-tax money for a partial distribution while leaving all pretax money in the same plan account. The notice covers qualifying employer-plan distributions, not IRA distributions.

Simplified example: An eligible full distribution from a non-Roth 401(k) account consists of $200,000 pretax and $50,000 after-tax contributions, with no earnings in the after-tax subaccount. With the allocation selected before the coordinated direct rollovers, $200,000 could go to a Traditional IRA and $50,000 to a Roth IRA. The pretax rollover is not currently taxable; the after-tax contribution is not taxed again. Earnings on after-tax contributions are pretax. Confirm the plan's source records, distribution eligibility and acceptance by each destination.

The Cream-in-the-Coffee Problem: You Cannot Earmark an IRA Conversion

A common metaphor for IRA pro-rata is coffee and cream: a conversion cannot select only the basis after pretax and after-tax amounts share the owner's IRA pool. With $100,000 pretax and $7,500 basis under the simplified facts above, the annual ratio is 93.0233% pretax and 6.9767% basis. That year's ratio applies across the distributions and conversions covered by Form 8606; it is recalculated in a later year from that year's basis, transactions and December 31 value.

The metaphor has an important limit: eligible pretax IRA money may be moved to an accepting employer plan under IRC §408(d)(3)(A)(ii), while IRA basis stays behind. A completed direct roll-in by year-end can change the conversion-year denominator; a rollover crossing year-end needs the specific treatment described above. Converting a pretax amount instead generally produces taxable income.

Each Spouse Has a Separate IRA Pool

The pro-rata rule aggregates each spouse's own non-Roth IRAs separately. A joint return does not merge the spouses' IRA pools. Accounts kept as a beneficiary also retain the separately tracked inherited basis described above.

Separate-owner example: One spouse has a $300,000 pretax Traditional IRA. The other has no existing non-Roth IRA amounts, then makes an eligible $7,500 nondeductible contribution and converts it in 2026. With no value changes or other relevant transactions, that spouse's $7,500 conversion is fully allocated to basis, even though the other spouse's IRA remains. A conversion by the spouse with the pretax IRA would use that spouse's own pool.

One spouse's pretax IRA therefore does not enter the other spouse's conversion ratio. Each spouse still needs separate records, and any employer-plan roll-in depends on that spouse's plan accepting the exact eligible pretax source.

When Prior-Year Basis Records Are Missing

A missing Form 8606 does not prove that basis is zero. If an earlier nondeductible Traditional IRA contribution may not have been reported, reconstruct the history before relying on the current-year ratio. Useful records include prior federal returns, Forms 8606, Forms 5498, account statements, and documents showing any intervening distributions, conversions, rollovers, or transfers.

The current Form 8606 instructions tell a taxpayer with basis from prior years to enter the total basis carried into the year. They do not create a shortcut for an unsupported estimate. A tax professional can help determine whether a prior-year return or Form 8606 should be corrected and how much basis can be substantiated. Until the history is resolved, treat the conversion result as undetermined rather than assuming either zero basis or a tax-free conversion.

Article History

October 3, 2026 — Correction: Corrected the treatment of a spouse who keeps an IRA inherited and removed the claim that making an inherited Roth IRA the spouse's own brings it into the Traditional-side pool. Replaced an outdated inherited-account citation with current IRS basis guidance, repaired the chart proportions and corrected a blanket December 31 plan-receipt deadline that omitted qualifying outstanding IRA-to-plan rollovers. Also corrected the ordering explanation for workplace Roth rollovers. Clarified Roth SEP/SIMPLE treatment, example assumptions, the form's ratio limits and the conditional plan-rollover rule. See the public correction record.

August 24, 2026 — Correction: Corrected the annual denominator, worked-example arithmetic and cleanup sequence. The examples follow conversion-year December 31 value plus relevant same-year conversions and distributions.

August 23, 2026 — Correction: Corrected the Form 8606 part map and filing-trigger guidance.