The pro-rata rule (IRC §408(d)(2)) aggregates one owner's Traditional, SEP, and SIMPLE IRAs into an annual pool. Potential ways to reduce or eliminate the conversion-year pretax pool include (1) completing an eligible reverse rollover of the otherwise taxable IRA amount to an employer plan that accepts the exact source; (2) converting the full pool and paying the resulting tax; or (3) waiting for a year with no conversion-year December 31 pretax IRA amount. Basis cannot be rolled into an employer plan.

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Quick Facts

  • infoPro-rata rule aggregates traditional + SEP + SIMPLE IRAs per IRC §408(d)(2). Not Roth IRAs. Not 401(k)s.
  • check_circleA reverse rollover can help when it is actually available. The employer plan must accept the exact IRA source, and only the otherwise taxable amount can move; basis cannot.
  • infoForm 8606 uses an annual denominator. It includes the conversion-year December 31 Traditional/SEP/SIMPLE IRA value plus relevant same-year distributions and conversions. Eligible cleanup can occur before or after the conversion but must be complete by December 31.
  • warningSEP and SIMPLE IRAs are aggregated. A receiving plan may reject either source, and a SIMPLE IRA generally cannot move to a non-SIMPLE plan until the two-year participation period ends.
  • check_circleA properly separate nonspouse inherited IRA is excluded. A surviving spouse can instead elect to treat inherited IRA funds as their own, which changes the result.

How the Pro-Rata Math Actually Works

Form 8606 allocates basis using an annual denominator: the conversion-year December 31 value across all of one owner's Traditional, SEP, and SIMPLE IRAs, plus relevant same-year distributions and conversions. The calculation is not a snapshot taken on the conversion date.

Worked example: assume $92,500 of pre-tax IRA money, $7,500 of basis, a $7,500 conversion on December 15, no other IRA transactions or gains, and a $92,500 combined December 31 balance. The annual denominator is $100,000, of which $7,500 (7.5%) is basis:

  • Tax-free portion: $7,500 × 7.5% = $562.50
  • Taxable portion: $7,500 × 92.5% = $6,937.50

You pay ordinary income tax on $6,937.50. Worse, $6,937.50 of basis remains in the traditional IRAs (the basis "moved" with the converted dollars). Future conversions face the same proportional rule.

Path 1: Use an Employer Plan That Accepts the IRA Source

Employer-plan dollars are outside the IRA aggregation pool, but a reverse rollover is conditional. The receiving plan must accept the exact Traditional, SEP, or eligible SIMPLE IRA source. Only the otherwise taxable amount may move; basis cannot.

Procedure:

  1. Confirm that the plan accepts the exact IRA source and ask what documentation it requires. A SIMPLE IRA generally must satisfy its two-year participation period before moving to a non-SIMPLE plan.
  2. Request a direct rollover of only the eligible, otherwise taxable amount. A direct transaction avoids the 60-day redeposit risk and creates a clearer record trail.
  3. Confirm the rollover reaches the plan by December 31 of the conversion year. It may occur before or after the conversion.
  4. A nondeductible Traditional IRA contribution may be followed by a Roth conversion. Federal law sets no minimum waiting period; file Form 8606 to report the basis and calculate the taxable amount.

If the eligible rollover leaves only documented basis in the owner's IRAs, a later conversion may be nontaxable to that extent. It is not automatic: gains, other same-year IRA transactions, the December 31 value, and the taxpayer's Form 8606 basis history still control the result.

Path 2: Convert Everything

If the pre-tax IRA balance is small enough that paying the tax in one year is acceptable, converting the whole pool can remove that year's remaining pretax IRA amount. A later-year conversion still depends on that later year's IRA activity, December 31 value, and basis records.

There is no universal balance threshold for this choice. The result depends on the taxpayer's marginal brackets, state tax, income-based benefits and premiums, available cash, and conversion horizon.

Worked example: assume $30,000 of pre-tax IRA money, $7,500 of documented basis, a full $37,500 conversion, and no other IRA activity. The $30,000 pre-tax portion is taxable and the $7,500 basis is nontaxable. Applying a flat illustrative 22% rate to the taxable portion gives $6,600 of federal tax; an actual return may span brackets or trigger other effects. Use the True Cost of a Conversion tool to see the broader federal, state, and IRMAA stack.

Path 3: Wait (or Don't Rollover)

If you anticipate leaving a job and rolling a pre-tax plan balance into an IRA, remember that transaction order within the same year does not avoid pro-rata. An IRA rollover completed during the conversion year enters that year's annual denominator even if the Roth conversion happened first. Two planning options:

  • Don't roll the 401(k) into an IRA. Leave it at the former employer (if allowed) or roll into your new employer's 401(k). The dollars stay in employer-plan land, outside §408(d)(2).
  • Keep conversion years separate when practical. A plan-to-IRA rollover completed after December 31 does not retroactively change the prior conversion year's Form 8606 calculation, although it can affect later conversion years.

If pretax money is already in an IRA, the available choices depend on tax cost and plan terms. It may be converted, retained for a later year, or moved through an eligible reverse rollover if a plan accepts the source.