Pro Rata Calculation Backdoor Roth

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Backdoor Roth IRA Pro-Rata Calculator

This is the total of your after-tax contributions (Found on IRS Form 8606, Line 14 of previous year).

Include the balance of ALL non-Roth IRAs at the end of the year (excluding the conversion itself).

function calculateProRata() { var basis = parseFloat(document.getElementById('basisAmount').value); var conversion = parseFloat(document.getElementById('conversionAmount').value); var balance = parseFloat(document.getElementById('yearEndBalance').value); if (isNaN(basis) || isNaN(conversion) || isNaN(balance)) { alert("Please enter valid numbers for all fields."); return; } // Total Value = Total year-end balance + distributions/conversions made during the year var totalValue = balance + conversion; // Tax-free ratio = Basis / Total Value var ratio = basis / totalValue; if (ratio > 1) ratio = 1; var taxFreeAmount = conversion * ratio; var taxableAmount = conversion – taxFreeAmount; document.getElementById('totalAssets').innerText = '$' + totalValue.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('taxFreePercent').innerText = (ratio * 100).toFixed(2) + '%'; document.getElementById('taxFreeAmt').innerText = '$' + taxFreeAmount.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('taxableAmt').innerText = '$' + taxableAmount.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('proRataResult').style.display = 'block'; }

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The "Backdoor Roth" is a popular strategy for high-income earners to contribute to a Roth IRA when their income exceeds the direct contribution limits. However, the IRS Pro-Rata Rule is the single biggest trap that can lead to an unexpected tax bill. If you have any pre-tax money in any Traditional, SEP, or SIMPLE IRA, you cannot choose to "only" convert your after-tax (non-deductible) dollars. The IRS views all your non-Roth IRAs as one big bucket.

How the Pro-Rata Formula Works

When you perform a conversion, the IRS calculates the tax-free portion based on the ratio of your non-deductible contributions (your "basis") to the total value of all your non-Roth IRA accounts. The formula is:

(Total Non-Deductible Basis) / (Total Year-End Balance of all IRAs + Conversion Amount) = Tax-Free %

The "Cream in the Coffee" Analogy

Imagine your Traditional IRA is a cup of coffee. Your non-deductible contribution (the money you already paid taxes on) is the cream. Once you pour the cream into the coffee, you can't just spoon out only the cream. Every sip (or conversion) you take will be a mixture of both coffee (taxable pre-tax money) and cream (tax-free after-tax money). The Pro-Rata rule is the IRS's way of ensuring they get their share of the "coffee."

Example Calculation

• Scenario: You have $93,000 in a Rollover IRA (all pre-tax). You contribute $7,000 as a non-deductible contribution to a Traditional IRA with the intent to do a Backdoor Roth conversion.
• Total IRA Value: $100,000 ($93k + $7k).
• The Ratio: Your basis ($7,000) divided by the total value ($100,000) is 7%.
• The Tax Hit: When you convert that $7,000 to a Roth IRA, only 7% ($490) is tax-free. The remaining $6,510 is considered taxable income.

Ways to Avoid the Pro-Rata Rule

If you want to perform a clean Backdoor Roth without paying extra taxes, you generally have two options:

1. The Reverse Rollover: Roll your pre-tax IRA assets into a 401(k) or 403(b) plan. The Pro-Rata rule does not look at employer-sponsored plans, only IRAs.
2. Total Conversion: Convert the entire balance of all your IRAs to Roth. You will pay taxes on all the pre-tax growth and contributions now, but all future growth will be tax-free.
3. Distribute/Empty the IRAs: Ensure all Traditional, SEP, and SIMPLE IRAs have a $0 balance by December 31st of the year you perform the conversion.

Frequently Asked Questions

Does my spouse's IRA count? No. The "I" in IRA stands for Individual. The IRS applies the pro-rata rule to each individual separately.

Do 401(k) balances affect the rule? No. Only Traditional IRAs, SEP IRAs, and SIMPLE IRAs are included in the calculation.

What date does the IRS use for the balance? The IRS looks at your aggregate IRA balance as of December 31st of the year the conversion occurs, not the balance on the day you did the conversion.