Backdoor Roth Calculator — Pro-Rata Rule

The backdoor Roth is a two-step manoeuvre: contribute to a traditional IRA without taking a deduction, then convert that contribution to a Roth. Since the contribution was never deducted, the conversion should be tax-free. For someone whose only IRA is the one they just opened, it is.

The problem is section 408(d)(2), the aggregation rule. For the purpose of working out how much of any distribution or conversion is taxable, the IRS treats every traditional, SEP and SIMPLE IRA you own as a single account. You are not permitted to convert the after-tax dollars and leave the pretax ones behind, however carefully you separate them into different accounts at different custodians.

The image usually used is cream in the coffee. Once the pretax and after-tax money is in the same notional pot, any cup you pour out contains the same proportion of each. If 92.5% of your total IRA balance is pretax, then 92.5% of your conversion is taxable — even if the dollars you moved were, in a plain physical sense, the ones you contributed last week.

The people most likely to be caught are precisely the people most likely to try it: high earners phased out of a direct Roth contribution, who have accumulated a substantial rollover IRA from a previous employer.

The denominator of the pro-rata fraction includes traditional, SEP and SIMPLE IRAs. It does not include workplace plans. A 401(k) or 403(b) balance, however large, is invisible to this calculation.

So the standard remedy is a reverse rollover: move the pretax IRA money into your current employer's 401(k), if the plan accepts incoming rollovers, leaving only after-tax basis in the IRA. The pro-rata ratio collapses to approximately 1, and the conversion becomes almost entirely tax-free.

The timing is unforgiving. The pro-rata calculation uses the value of your IRAs on 31 December of the conversion year, not the day you convert. Completing the rollover in November of the same year works. Completing it in January of the following year does not, and there is no way to undo a conversion — the recharacterisation of conversions was repealed by the Tax Cuts and Jobs Act in 2018.

Form 8606 is where after-tax basis lives, and it is the taxpayer's responsibility to file it — no custodian tracks this for you. Each nondeductible contribution adds to basis; each conversion or distribution consumes a proportionate share of it.

If the form is never filed, or is lost across a change of preparer, the IRS default is that the entire balance is pretax. The practical consequence is paying income tax a second time on money that was already taxed once. This is a genuinely common and entirely avoidable error, and the remaining basis figure shown above is the number to carry forward.