The pro-rata rule: why the IRS won't let you pick the after-tax dollars

By Tom, CPA · Updated October 25, 2026

TL;DR: When you convert or withdraw from a traditional IRA that holds both pre-tax and after-tax (basis) money, the IRS treats each dollar as a proportional mix. The split uses all your traditional, SEP and SIMPLE IRAs combined, valued at December 31 of the year. 401(k)s and your spouse's IRAs don't count.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Imagine a jar with 90 red jellybeans and 10 blue ones. You only want blue. The IRS says: fine, reach in, but whatever you pull out will be 90% red. That's the pro-rata rule, also known as the "cream in the coffee" rule. Once after-tax money is stirred into a pre-tax IRA, you can't scoop out just the cream.

It's the single biggest reason a backdoor Roth turns into a surprise tax bill. It's also a rule that's easy to understand once you see the actual formula, which is less scary than it looks on Form 8606.

CPA Warning Label: The pro-rata rule is calculated on December 31, not the day you convert. A January backdoor can turn taxable because of a rollover you made in November.

What the rule actually says

If you've ever made nondeductible contributions to a traditional IRA, you have basis: money that's already been taxed. When you take a distribution or convert, the taxable part is figured by comparing your total basis with the total value of all your traditional IRAs. IRS Publication 590-B's worksheet uses:

• Your basis in all traditional IRAs (prior-year basis plus this year's nondeductible contributions), divided by
• The value of all your traditional IRAs as of December 31 of the year, plus distributions and conversions taken during the year, plus any outstanding rollovers.

That fraction is the tax-free percentage of every dollar you distributed or converted that year. The rest is taxable.

Which accounts count, and which don't

That table is the whole strategy in miniature: anything that moves pre-tax money out of the "Yes" rows before December 31 cleans up the math.

Illustration: the math, step by step

Illustration (assumptions): Larry has a $46,000 rollover IRA (all pre-tax, no basis) from an old job. In 2026 he contributes $7,500 nondeductible and converts $7,500 to Roth in the same month. On December 31 the rollover IRA is worth $50,000 (it grew), and the contributory IRA is empty after the conversion.

1. Total basis: $0 + $7,500 = $7,500
2. Denominator: $50,000 year-end value + $7,500 converted = $57,500
3. Tax-free fraction: $7,500 ÷ $57,500 = 13.04%
4. Tax-free part of conversion: $7,500 × 13.04% = $978
5. Taxable part: $7,500 − $978 = $6,522
6. Remaining basis carried forward: $7,500 − $978 = $6,522

Larry didn't lose his basis; it carries forward on Form 8606 to future years. But he paid tax now on $6,522 he expected to be tax-free, and his remaining basis is now spread thinly across $50,000 of pre-tax money. Try your numbers in the pro-rata calculator.

Illustration: the cleanup version

Same assumptions, except in October Larry rolls the $50,000 rollover IRA into his current employer's 401(k), which accepts roll-ins of pre-tax IRA money.

• December 31 traditional IRA value: $0
• Denominator: $0 + $7,500 = $7,500
• Tax-free fraction: 100%. Taxable part of the conversion: $0.

The only difference is where the pre-tax money lives on December 31. Note that the rollover into the 401(k) can only include pre-tax amounts; after-tax basis can't be rolled from an IRA into an employer plan.

Ways to fix a pro-rata problem

• Roll pre-tax IRA money into an employer plan (401(k), 403(b), governmental 457(b)) that accepts roll-ins. Ask the plan first.
• Use a solo 401(k) if you have self-employment income and your plan accepts roll-ins. See the solo 401(k) guide.
• Convert everything and pay the tax, which can make sense in a low-income year, such as the first years of early retirement. See the conversion ladder timeline.
• Skip the backdoor for a year while you sort it out. A taxable brokerage account isn't a failure; it's a flexible account with no rules about December 31.

Timing traps across the calendar

Because the measuring date is December 31, the order of events within a year doesn't save you. A few patterns that catch people:

• The January backdoor, November rollover. Someone converts a clean $7,500 in January, then leaves a job in November and rolls a $300,000 401(k) into a new rollover IRA. On December 31 the IRA total is $300,000, so the January conversion becomes almost entirely taxable. Rolling the old 401(k) into the new employer's plan instead, or waiting until January to move it to an IRA, avoids this.
• The new SEP IRA. Opening a SEP IRA for side-business income in the same year as a backdoor adds pre-tax IRA money to the total. A solo 401(k) avoids the issue.
• The surprise inherited-IRA confusion. Inherited IRAs are not combined with your own IRAs for this purpose, so they don't spoil your backdoor math. They have their own distribution rules instead; see the inherited IRA guide.
• The late-year market jump. If you have both basis and pre-tax money, a rising market in December increases the denominator and slightly reduces the tax-free share of that year's conversions. Annoying, but small.

How basis behaves in early retirement

Basis isn't only a backdoor issue. If you have, say, $40,000 of old nondeductible contributions mixed into a $400,000 traditional IRA, every withdrawal or conversion you make in early retirement is 10% tax-free until the basis is used up. That's useful in a Roth conversion ladder: each year's conversion carries a proportional slice of basis, reducing taxable income a little. It also means Form 8606 shows up on your return every year you convert, so keep that basis figure current.

Illustration: $40,000 basis, $400,000 total traditional IRA value at year end (after a $40,000 conversion that year, so the denominator is $440,000). Tax-free share: $40,000 ÷ $440,000 = 9.09%, so about $3,636 of the $40,000 conversion is tax-free and $36,364 is taxable. Basis remaining: $36,364.

Recordkeeping that makes the rule painless

The pro-rata rule is only scary when your basis number is a mystery. A simple system fixes that:

• Keep a single folder (paper or digital) with every Form 8606 you have ever filed, in year order. The latest one shows your current total basis on its last basis line.
• Save each year's December 31 IRA statements for every custodian. Those are the denominator.
• Note any rollovers that were in transit at year end, because outstanding rollovers are added back in the worksheet.
• Before any conversion, write down the expected December 31 balances and run the fraction once. It takes five minutes and prevents most surprises.

Software handles the arithmetic, but only if it gets the right inputs. Garbage in, Form 8606 out.

Form 8606: where it all lives

Form 8606 Part I tracks nondeductible contributions and runs the pro-rata calculation. Line by line, it mirrors the steps above: basis, year-end value, distributions and conversions, and the resulting nontaxable percentage. You file it for any year you make a nondeductible contribution, take a distribution from an IRA with basis, or convert. Publication 590-A notes a $50 penalty for not filing a required 8606 unless you show reasonable cause, but the bigger risk is losing track of basis and paying tax twice.

If you discover you made nondeductible contributions years ago and never filed 8606, it's generally possible to file the missing forms for those years. Gather old statements and returns first; reconstruction is mostly detective work.