What Is the Pro-Rata Rule for IRAs?

The pro-rata rule is an IRS rule that determines what portion of an IRA distribution or Roth conversion is taxable when you have a mix of pre-tax and after-tax (non-deductible contribution) money in your traditional IRAs. Rather than letting you choose which dollars to withdraw first, the IRS requires you to treat all your traditional IRAs as one pool — the taxable percentage of any withdrawal equals the pre-tax balance divided by the total balance across all IRAs. For example, if you have $90,000 in pre-tax IRA funds and $10,000 in after-tax (non-deductible) contributions, 90% of any distribution is taxable. This rule significantly complicates the backdoor Roth IRA strategy for people who have large pre-tax IRA balances — the non-deductible contribution you intend to convert can't be cleanly separated from the pre-tax money. Rolling pre-tax IRA funds into an employer 401(k) before doing a backdoor Roth conversion is a common strategy to sidestep the pro-rata rule.