Roth IRAs are a dependable way to build retirement savings because earnings grow tax-free. However, for higher-income taxpayers, contributing directly can be more limited.
For 2026, income limits restrict direct Roth IRA contributions. Married couples filing jointly can make only partial contributions once adjusted gross income (AGI) exceeds $242,000, with contributions fully phased out at $252,000. For single filers and heads of households, the phaseout range is $153,000 to $168,000.
These limits do not apply to Traditional IRAs. Anyone with qualifying earned income can make a non-deductible IRA contribution regardless of income. As a result, some high-income taxpayers use a strategy of converting those funds to a Roth IRA, where future earnings may be tax-free instead of taxable upon withdrawal.
Understanding the Pro-Rata Rule
Converting an IRA to a Roth IRA is straightforward, but it requires distinguishing between after-tax and pre-tax dollars.
- After-Tax Money: Non-deductible IRA contributions that generally are not taxed upon conversion.
- Pre-Tax Money: Includes deductible IRA contributions and all associated investment earnings across all your IRA accounts.
When completing a partial Roth conversion, you cannot choose to only convert after-tax dollars. Instead, the IRS requires a proportional calculation, known as the ‘pro-rata rule1 to determine how much of the conversion is taxable.
The Pro-Rata Rule Formula
The pro-rata calculation requires you to divide your total after-tax money by the total value of all your IRAs combined. You then multiply that percentage by the amount you are converting.
Pro-rata calculation =
total after-tax money IRA balances (in all IRA accounts) ÷ total value of all IRAs x amount converted
Once you have that percentage, you apply it to your conversion amount to find out how much of the transfer avoids taxation:
After-Tax Portion = Amount Converted x Tax-Free Percentage
A Real-World Pro-Rata Calculation Example
In this case:
- Total after tax contributions: $18,000.
- Total IRA balances: $100,000. ($23,000 + $77,000) The IRA today is worth $23,000, including market growth. Let’s also assume the taxpayer has a separate IRA rollover account that is worth $77,000.
- After-tax percentage is 18%
They decide to convert the $23,000 IRA to a Roth IRA. Applying this to the conversion:
- After-tax (tax-free) portion:
$23,000 x 18%= $4,140
- Pre-tax (taxable portion:
$23,000 — $4,140= $18,860
Things to Consider with the Pro-Rata Rule
If you’re trying to apply the pro-rata formula to your own situation, here are a few factors to keep in mind.
- You must include the value of all IRAs when calculating the after-tax percentage, even if only one account contains after-tax contributions. In our example, $18,860 of the $23,000 conversion was taxable and $4,140 was tax-free, leaving $13,590 in non-deductible contributions remaining.
- IRAs are considered individual IRAs even for taxpayers filing a joint return. An individual IRA is not combined with the spouse’s IRA for purposes of the pro-rata rule.
- You will use IRS Form 8606 to track your after-tax IRA balances. The form should be filed with your tax return in any year you make an after-tax contribution to your IRA (or roll over after-tax funds from an employer plan). It must also be filed in any year that a distribution is taken from the IRA.
- You can’t calculate the exact pro-rata percentage until the end of the tax year. Rather than being based on the date of conversion, the pro-rata calculation is based on IRA balances as of December 31st the year the conversion was made. Any growth (or loss) in the funds from the date of conversion to the end of the year will impact the calculation.
- 401(k) and 403(b) plans, as well as profit sharing plans, are not included in the pro-rata formula. You would only include the value of these accounts if you decided to roll over the plan assets to an IRA during that year.
- Lastly, SEP IRA values and SIMPLE IRA values are included in the definition of all IRAs. Even though these types of accounts are company sponsored, they must be included in the pro-rata calculation. An inherited IRA, however, is not used in the calculation.2
Final Thoughts: Planning Your Roth IRA Conversion
The pro-rata rule doesn’t prevent Roth conversion strategies, but it does require careful planning. Before moving forward, review all your existing Traditional, SEP, and SIMPLE IRA balances to accurately understand the potential tax impact. Because the IRS aggregates your total IRA balances, overlooking even a small, overlooked balance can lead to an unexpected tax bill.
If you are unsure how this formula applies to your specific situation, the retirement planning professionals at Rodgers & Associates can help you evaluate your options and align a Roth conversion strategy with your long-term retirement goals.
- Also referred to as the IRA Aggregation Rule underIRC Section 408(d)(2).
- Treasury Regulation 1.408–8
This article was originally published on March 31, 2018, and was updated for accuracy and relevance on the date above.
