The Pro Rata Rule: How the IRS Taxes IRA Conversions (2026)

The pro rata rule is the IRS method that decides how much of an IRA distribution or Roth conversion is taxable when your traditional IRAs hold both pre-tax and after-tax money. It stops you from converting or withdrawing only the tax-free dollars and leaving the pre-tax balance untouched. Instead, every dollar you move out is treated as a proportional mix of both.

Last reviewed: July 2026 | Written and reviewed by Craig Wear, CFP®, Q3 Advisors

What is the pro rata rule?

The pro rata rule is an IRS aggregation rule that treats all of your traditional IRAs as one combined pool when you convert or withdraw money, so any distribution carries a proportional share of pre-tax and after-tax dollars. It exists to prevent taxpayers from cherry-picking their nondeductible (already-taxed) contributions and moving only those to a Roth (Source: IRS Form 8606, Part I, 2025).

The after-tax money in your IRAs is called your “basis,” defined by the IRS as the total of all your nondeductible contributions and nontaxable rollover amounts, minus your nontaxable distributions (Source: IRS Instructions for Form 8606, 2025). The rest of your traditional IRA balance is pre-tax and fully taxable when it leaves the account. The key idea is aggregation: even if your basis sits in a single account, the calculation combines every traditional IRA you own, so you cannot point to one account and call it “the after-tax one.”

The pro-rata formula on Form 8606

The pro-rata formula divides your total after-tax basis by the combined value of all your traditional IRAs to find the tax-free fraction of any amount you convert or withdraw; the remainder is taxable. The IRS runs this math in Part I of Form 8606, and the denominator is more precise than most summaries admit (Source: IRS Form 8606, lines 5 to 11, 2025).

On the 2025 Form 8606, Line 6 asks for “the value of all your traditional IRAs as of December 31, 2025, plus any outstanding rollovers.” Line 9 adds that year-end value to your distributions (Line 7) and conversions (Line 8). Line 10 then divides your basis (Line 5) by Line 9, rounded to at least three decimal places, to produce the nontaxable fraction. Line 11 multiplies your converted amount by that fraction to give the tax-free portion.

Written as a formula:

• Nontaxable fraction = total after-tax basis ÷ (Dec 31 value of all traditional IRAs + distributions + conversions)
• Tax-free amount converted = amount converted × nontaxable fraction
• Taxable amount = amount converted minus tax-free amount

The form’s top note confirms the pool: “Except where stated otherwise, ‘traditional IRA’ includes traditional SEP IRAs and traditional SIMPLE IRAs” (Source: IRS Form 8606, 2025). That single line is why SEP and SIMPLE balances land in your denominator.

A worked example of the pro rata rule

Here is one round-number example. Suppose you make a $7,000 nondeductible contribution to a traditional IRA, and across all your traditional IRAs the total value is $100,000 at year-end (including that $7,000). Your after-tax basis is $7,000, so the tax-free fraction is $7,000 ÷ $100,000, or 7 percent. This mirrors the method in IRS Form 8606, Part I (2025).

If you then convert $7,000 to a Roth IRA, only 7 percent of it (about $490) comes out tax-free. The other 93 percent (about $6,510) is taxable income, even though you contributed with after-tax dollars. The pre-tax money already sitting in your IRAs “contaminates” every conversion you make.

IRS Publication 590-B gives its own version: a taxpayer with $10,000 of nondeductible basis inside $40,000 of total IRAs faces a 75 percent taxable ratio ($30,000 ÷ $40,000), so 75 percent of a conversion is taxable “even though the taxpayer thought they were only converting their nondeductible contribution” (Source: IRS Pub 590-B, 2025). Same trap, different numbers.

Which accounts are included and excluded

The pro-rata calculation includes every traditional, rollover, SEP, and SIMPLE IRA you own, but excludes employer plans, Roth IRAs, inherited IRAs, and your spouse’s IRAs. Knowing which balances land in the denominator is the difference between a clean conversion and a surprise tax bill (Source: IRS Form 8606 and Instructions, 2025).

Because 401(k) and similar employer plans sit outside the calculation, they play a central role in avoiding the rule, covered further below. Roth IRAs are excluded because that money is already after-tax. Each spouse runs the formula on their own IRAs, so one partner’s large pre-tax balance does not taint the other’s conversion.

Why the backdoor Roth triggers a surprise tax bill

The pro rata rule is a frequent reason a backdoor Roth produces an unexpected tax bill. The strategy relies on the fact that Roth conversions carry no income limit, unlike Roth contributions, so a high earner can contribute to a nondeductible traditional IRA and convert it (Source: IRS Pub 590-A, 2025). The rule turns that plan taxable whenever pre-existing pre-tax IRA money is present.

If your only IRA money is a fresh $7,000 nondeductible contribution and nothing else, the conversion is essentially tax-free because your basis fraction is close to 100 percent. But if you also hold a $200,000 rollover IRA from an old 401(k), that pre-tax balance floods the denominator and most of your conversion becomes taxable. The backdoor Roth works cleanly only when little or no pre-tax IRA money exists.

The December 31 timing rule most guides skip

The pro-rata calculation uses your December 31 year-end aggregate balance for the year of the conversion, not the balance on the day you convert. Any strategy to shrink your pre-tax IRA balance must be finished by December 31, because Form 8606 Line 6 asks specifically for value “as of December 31” (Source: IRS Form 8606, 2025). Timing is a hard deadline, not a suggestion.

This matters most for the common fix of rolling pre-tax IRA money into a 401(k). The rollover has to be completed and out of the IRA by December 31 of the conversion year. A rollover that is merely requested or in transit on December 31 can still show up in the year-end value, which may pull the taxable fraction higher than expected. That is why some people complete the 401(k) roll-in early in the year, confirm the IRA reads $0 in pre-tax dollars, and only then convert.

How to avoid or reduce the pro rata rule

The rules allow several ways to limit pro-rata taxation, and each one works by removing pre-tax dollars from your IRAs before the calculation runs on December 31. None of these are recommendations for your situation; they are the mechanics the tax code permits (Source: IRS Form 8606 and Pub 590-A, 2025).

1. Rolling pre-tax IRA money into an employer 401(k). Because 401(k), 403(b), and 457(b) plans are excluded from the pro-rata pool, moving deductible IRA balances into a workplace plan (where the plan accepts roll-ins) can leave only after-tax basis behind. The rollover has to be completed by December 31 to affect that year’s calculation.
2. Emptying pre-tax traditional IRAs to a $0 year-end value. Converting or otherwise clearing all pre-tax balances so the year-end pre-tax value is zero removes the contamination, though the pre-tax amounts converted are themselves taxable in that year.
3. Contributing only to a Roth or Roth 401(k) going forward. Where no pre-tax IRA basis is ever created, there is nothing to prorate against.
4. Timing contributions and conversions in the same year. Because the rule reads a year-end snapshot, holding the traditional IRA to only the nondeductible contribution through December 31 keeps the taxable fraction low.

Each approach carries its own tax and eligibility details, and a Roth conversion done to clear pre-tax balances can raise your taxable income for the year, which may ripple into other thresholds. That connects the pro rata rule directly to conversion planning, discussed next.

How the pro rata rule connects to Roth conversion planning

Clearing pre-tax IRA balances often means converting them, and a larger conversion raises your modified adjusted gross income for that year. Higher MAGI can affect other tax thresholds such as Medicare IRMAA surcharges and the net investment income tax. This is educational context, not advice; how these interact depends on your full financial picture.

Form 8606 and tracking your basis year to year

Form 8606 is the IRS form that tracks your after-tax IRA basis so you are not taxed twice on money you already paid tax on. You must file it for any year you make a nondeductible traditional IRA contribution, convert traditional or SEP or SIMPLE IRA money to a Roth, or take a distribution while you hold basis (Source: IRS Instructions for Form 8606, 2025). Without it, the IRS has no record of your basis.

Basis carries forward across years through Line 14, described on the form as “your total basis in traditional IRAs for 2025 and earlier years” (Source: IRS Form 8606, 2025). The Line 14 figure from one year becomes the starting basis for the next year’s calculation. Miss a filing and you can lose track of after-tax dollars, which risks paying tax on them a second time when you eventually withdraw.

One nuance on SEP and SIMPLE IRAs: employer contributions to those plans are pre-tax and do not count as basis, so they add to your pro-rata denominator rather than your after-tax total (Source: IRS Instructions for Form 8606, Line 1, 2025). The IRS advises taxpayers to “keep track of your basis to figure the nontaxable part of your future distributions.”

How the pro rata rule works on withdrawals and RMDs

The pro rata rule is not only a conversion rule. It applies to any distribution from a traditional IRA that holds basis, including ordinary withdrawals and required minimum distributions, so each dollar you take out is a proportional blend of pre-tax and after-tax money (Source: IRS Pub 590-B and Form 8606, 2025). You cannot withdraw only your basis.

The same Form 8606 fraction governs it. If your basis is 7 percent of your total traditional IRA value, then 7 percent of a $20,000 withdrawal (about $1,400) is tax-free and the rest is taxable. The distributions line (Line 7) feeds the same denominator as conversions.

This extends to required minimum distributions. An RMD taken from an IRA with basis is likewise prorated, so a small slice comes out tax-free while the majority is taxable income. The rule treats every exit from the account the same proportional way, whether you chose the timing or the RMD schedule forced it.

2026 IRA and Roth contribution limits

For 2026, the IRA annual contribution limit is $7,500 and the age-50 catch-up is $1,100, both increased from 2025 under the IRS cost-of-living notice (Source: IRS Notice 2025-67 and IRS newsroom release, 2025). These figures are inflation-adjusted most years, so a single-year number ages quickly and is worth confirming each tax year.

These phase-outs cap direct Roth contributions, which is exactly why higher earners look at the backdoor route and run into the pro rata rule. Note there is no income limit on Roth conversions themselves (Source: IRS Pub 590-A, 2025), so the conversion door stays open even when the direct-contribution door closes. For a broader table, see the 2026 retirement contribution limits.

Frequently asked questions

How do you calculate the pro rata rule?

Divide your total after-tax IRA basis by the combined value of all traditional, SEP, and SIMPLE IRAs, then multiply the amount you convert or withdraw by that fraction to find the tax-free portion. On Form 8606, the denominator is your December 31 value plus distributions plus conversions (Line 9), and the ratio on Line 10 is rounded to at least three decimals (Source: IRS Form 8606, 2025).

What is an example of the pro rata rule?

If you hold $7,000 of after-tax basis inside $100,000 of total traditional IRAs, your tax-free fraction is 7 percent. Converting $7,000 makes about $490 tax-free and about $6,510 taxable. IRS Publication 590-B shows a parallel case where $10,000 of basis in $40,000 of IRAs leaves 75 percent of a conversion taxable (Source: IRS Pub 590-B, 2025).

How do I avoid the pro rata rule?

Common approaches include rolling pre-tax IRA balances into an employer 401(k) that accepts roll-ins, emptying pre-tax traditional IRAs to a $0 year-end balance, or contributing only to Roth accounts so no pre-tax basis exists. Because the rule reads a December 31 snapshot, any such move must be completed by year-end to count (Source: IRS Form 8606, 2025).

Does the pro rata rule apply to 401(k)s?

No. Employer plans such as 401(k), 403(b), and 457(b) accounts are excluded from the pro-rata pool, so their balances do not enter the calculation (Source: IRS Form 8606 and Instructions, 2025). That exclusion is precisely why rolling pre-tax IRA money into a workplace 401(k) can reduce or remove pro-rata taxation on a later Roth conversion.

Does the pro rata rule include SEP and SIMPLE IRAs?

Yes. The 2025 Form 8606 states that “traditional IRA” includes traditional SEP and SIMPLE IRAs, so their balances are part of the year-end denominator (Source: IRS Form 8606, 2025). Employer contributions to those plans are pre-tax and add to the denominator rather than to your after-tax basis (Source: IRS Instructions for Form 8606, Line 1, 2025).

Can I convert only the after-tax portion of my IRA?

No. The pro rata rule prevents isolating after-tax dollars. Every conversion is treated as a proportional mix of pre-tax and after-tax money based on your combined IRA balances, so you cannot cherry-pick only your basis (Source: IRS Form 8606, Part I, 2025). This is the core purpose of the rule.

Does my spouse’s IRA affect my pro-rata calculation?

No. IRAs are individual accounts, and each spouse runs the pro-rata formula only on their own traditional, SEP, and SIMPLE IRAs. Your spouse’s pre-tax IRA balance does not enter your denominator, and yours does not enter theirs (Source: IRS Form 8606, 2025). Each files a separate Form 8606.

How does Form 8606 affect a Roth conversion?

Form 8606 both calculates the taxable portion of a conversion and records your remaining after-tax basis. Part I runs the pro-rata math, and Line 14 carries your basis forward to future years so you are not taxed twice on the same dollars (Source: IRS Form 8606, 2025). Filing it for every nondeductible contribution and conversion protects your basis record.

How does the pro rata rule work for a partial IRA withdrawal?

A partial withdrawal from a traditional IRA that holds basis is prorated the same way a conversion is. Each dollar is a blend of pre-tax and after-tax money, so if 7 percent of your IRA value is basis, roughly 7 percent of the withdrawal is tax-free and the rest is taxable income (Source: IRS Pub 590-B and Form 8606, 2025). Required minimum distributions are prorated identically.

Sources

IRS Form 8606 (2025), Part I lines 5 to 14: irs.gov/pub/irs-pdf/f8606.pdf
IRS Instructions for Form 8606 (2025): irs.gov/instructions/i8606
IRS Publication 590-B, distributions from IRAs: irs.gov/publications/p590b
IRS Publication 590-A, contributions to IRAs (Roth conversion income rules): irs.gov/publications/p590a
IRS Notice 2025-67 and newsroom release on 2026 limits: irs.gov 2026 limits release
IRS Tax Topic 557, additional tax on early IRA distributions: irs.gov/taxtopics/tc557

About the author

Disclaimer