Backdoor Roth IRA Pro-Rata Rule Explained
The Backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA, even if they exceed the income limitations for direct Roth contributions. This typically involves making non-deductible contributions to a Traditional IRA and then converting those funds to a Roth IRA.
However, if you have existing pre-tax funds in *any* Traditional, SEP, or SIMPLE IRA, the pro-rata rule comes into play during the Roth conversion. The pro-rata rule dictates that when you convert funds from a Traditional IRA to a Roth IRA, the taxable portion of the conversion is determined by the ratio of pre-tax to after-tax (non-deductible) funds across *all* of your non-Roth IRAs.
For example, if you have $10,000 in a Traditional IRA with $8,000 pre-tax and $2,000 after-tax (from previous non-deductible contributions), and you contribute another $6,000 on a non-deductible basis to do a backdoor Roth conversion, your total Traditional IRA balance for pro-rata calculation becomes $16,000 ($10,000 existing + $6,000 new). Out of this $16,000, $8,000 is pre-tax and $8,000 is after-tax. When you convert the $6,000, 50% ($8,000 / $16,000) of it is considered pre-tax, and thus taxable upon conversion.
This calculator helps you understand the potential taxable amount of your Roth conversion based on your existing IRA balances and the amount you intend to convert.