What Is the Pro-Rata Rule?
The Pro-Rata Rule is an IRS rule that determines how much of an IRA withdrawal or Roth conversion is taxablewhen you have a mix of pre-tax and after-tax (non-deductible) money across your IRAs.
The key idea is simple—but brutal if misunderstood:
The IRS does not let you choose which IRA dollars you withdraw or convert.
Instead, the IRS treats all of your Traditional IRAs as one combined pool and forces each distribution or conversion to contain a proportional mix of pre-tax and after-tax money.
Where the Pro-Rata Rule Comes From
The Pro-Rata Rule exists under IRC §72 and §408(d)(2). Congress created it to prevent taxpayers from:
- Making after-tax contributions
- Isolating those dollars
- Converting or withdrawing only the tax-free portion
The rule ensures that every dollar you touch carries its share of taxation, based on the ratio of after-tax basis to total IRA balances.
Which Accounts Are Included (Aggregation Rules)
For pro-rata purposes, the IRS aggregates the following accounts:
- Traditional IRAs
- Rollover IRAs
- SEP IRAs
- SIMPLE IRAs
These are all treated as one single IRA in the IRS’s eyes.
Accounts NOT included:
- 401(k)s
- 403(b)s
- 457 plans
- Roth IRAs
This distinction is critical for planning.
How the Pro-Rata Rule Works (Conceptually)
When you take a distribution or perform a Roth conversion, the IRS calculates:
- Your total IRA balance
- Your total after-tax basis (from Form 8606)
- The percentage of basis in your IRAs
- That percentage determines how much of the transaction is tax-free
You cannot opt to “use up” basis first.
The Pro-Rata Formula (Simplified)
Tax-Free Portion = (Total Basis ÷ Total IRA Balances)
The remainder of the distribution or conversion is taxable as ordinary income.
Pro-Rata Rule — Simple Example
| Item | Amount |
|---|---|
| Total Traditional IRA Balances | $300,000 |
| Non-Deductible Basis | $30,000 |
| Basis Percentage | 10% |
If you convert or withdraw $50,000:
| Result | Amount |
|---|---|
| Tax-Free Portion (10%) | $5,000 |
| Taxable Portion (90%) | $45,000 |
This applies every time you touch the account until basis is fully exhausted.
Pro-Rata Rule and Roth Conversions
The Pro-Rata Rule is most commonly encountered during Roth conversions.
Many people assume:
“I’ll just convert my non-deductible IRA to a Roth tax-free.”
The IRS response:
“Nope. You convert a percentage.”
| Scenario | Result |
|---|---|
| Only non-deductible IRA exists | Conversion mostly tax-free |
| Pre-tax IRAs also exist | Partial taxation |
| Basis not tracked | Full taxation risk |
| Pre-tax IRA moved to 401(k) | Pro-rata eliminated |
Why Form 8606 Is Mandatory
Form 8606 is how the IRS tracks your after-tax basis.
You must file Form 8606 when:
- You make a non-deductible IRA contribution
- You perform a Roth conversion with any basis
- You take IRA distributions with basis remaining
Failure to file Form 8606:
- Causes the IRS to assume zero basis
- Leads to double taxation
- Is one of the most common IRA tax errors
Pro-Rata Rule and Withdrawals
The rule applies equally to withdrawals, not just conversions.
Every distribution:
- Contains a tax-free portion (basis)
- Contains a taxable portion (pre-tax + earnings)
- May trigger penalties if under age 59½
You cannot withdraw “just your contributions.”
Pro-Rata Rule vs Roth IRA Ordering Rules
| Feature | Pro-Rata Rule | Roth Ordering Rules |
|---|---|---|
| Applies To | Traditional IRAs | Roth IRAs |
| Basis Isolation | No | Yes |
| Withdrawal Control | Forced ratio | Ordered buckets |
| Tax Predictability | Complex | High |
| Planning Precision | Critical | Flexible |
This contrast is why Roth accounts are often considered a destination, not a starting point.
How People Legally Avoid the Pro-Rata Rule
The Pro-Rata Rule cannot be ignored—but it can be planned around.
Common strategies include:
- Rolling pre-tax IRAs into a 401(k) or Solo 401(k)
- Completing conversions during low-income years
- Keeping IRAs “clean” before Backdoor Roth contributions
- Using SEPP and conversion sequencing intentionally
| Strategy | Effect |
|---|---|
| Move pre-tax IRA to 401(k) | Removes from pro-rata pool |
| Delay conversion | Avoids partial taxation |
| Poor tracking | Permanent tax damage |
Why the Pro-Rata Rule Matters for Advanced Planning
The Pro-Rata Rule directly affects:
- Backdoor Roth IRAs
- Roth conversion ladders
- SEPP strategies
- IRA aggregation cleanup
- Long-term tax projections
Ignoring it can blow up otherwise sound plans.
Understanding it allows you to:
- Control tax timing
- Reduce lifetime taxes
- Avoid irreversible mistakes
Common Pro-Rata Mistakes
- Assuming IRAs are treated individually
- Forgetting old rollover IRAs
- Missing Form 8606 filings
- Mixing deductible and non-deductible money blindly
- Converting without checking aggregation first
These mistakes are often permanent.
Bottom Line
The Pro-Rata Rule is not a loophole.
It is not optional.
And it is not forgiving.
It is the IRS enforcing fairness across IRA taxation.
If you understand it, you can plan around it.
If you ignore it, it will plan for you.