The backdoor Roth IRA pro-rata rule: when it's NOT tax-free (Form 8606, worked)

A "backdoor Roth" is a nondeductible contribution to a traditional IRA, converted to a Roth IRA soon after. It's a legal way for high earners (above the Roth IRA income limits) to get money into a Roth. The part almost everyone gets wrong: it's only tax-free if you have no other pre-tax money in any traditional, SEP or SIMPLE IRA. If you do, the IRS pro-rata rule -- sometimes called the "cream in your coffee" rule -- taxes part of the conversion, in proportion to how much of your total IRA money is pre-tax. The calculation is IRS Form 8606, Part I, and it's not optional or avoidable by converting "just the new contribution": the form forces every traditional/SEP/SIMPLE IRA you own into one blended pool. Below is that form applied exactly, in three worked examples, plus the standard legal workaround. For your own numbers, use the backdoor Roth pro-rata calculator.

The rule, in plain language

The IRS doesn't let you pick which dollars you convert. Every traditional, SEP and SIMPLE IRA you own (at any institution) is treated as one combined account for this purpose -- not the specific account you just contributed to. When you convert, the taxable share of that conversion equals the share of your total IRA money that's pre-tax (was deducted, or is employer/SEP/SIMPLE money, or is growth). Form 8606 computes this on a line called line 10: your nondeductible basis divided by your total IRA money, which becomes the tax-free fraction of anything you convert or withdraw that year.

The Form 8606 math (Part I, lines 1-14)

The taxable amount of the conversion is line 8 minus line 11. That's the number that shows up on your tax return as taxable income the year you convert.

Example 1: the clean backdoor Roth (no other IRA money)

Someone with no existing traditional, SEP or SIMPLE IRA balance anywhere contributes $7,000 to a new traditional IRA (nondeductible, because their income is too high to deduct it) and converts the full $7,000 to Roth the same year, before it grows.

With $0 in line 6, line 9 equals line 8 exactly, so line 10 is 100% and the whole conversion is tax-free. This is the only case where a backdoor Roth is completely clean -- and it depends entirely on line 6 being $0, not on your intentions when you made the contribution.

Example 2: the trap -- $93,000 in an existing IRA

Same $7,000 nondeductible contribution, converted the same year. But this time the person also has $93,000 sitting in a traditional IRA from an old 401(k) rollover years ago -- fully pre-tax, never touched for the backdoor Roth.

Only 7% of the $100,000 in total IRA money is the new nondeductible basis -- so only 7% of the $7,000 conversion comes out tax-free. The other $6,510 is taxed as ordinary income the year of the conversion, even though the $7,000 contribution itself was never deducted. The $93,000 doesn't have to be touched, withdrawn, or converted for this to happen -- it only has to exist in a traditional, SEP or SIMPLE IRA on Dec 31.

Example 3: carrying basis forward from a prior year

Someone made a $5,000 nondeductible contribution last year but never converted it (so it's tracked as basis on last year's Form 8606, line 14). This year they contribute another $7,000 nondeductible and convert $12,000 in one lump -- the full basis, no growth. They also have a separate $18,000 pre-tax SEP IRA they're not touching.

Prior-year basis adds to the numerator (it's still basis that was never deducted) but it doesn't change the fact that the SEP IRA's $18,000 dilutes the fraction. Two years of nondeductible contributions ($12,000 total basis) against $30,000 of total IRA money still leaves 60% of this conversion taxable.

The trap: a 401(k) doesn't count, and that's the fix

Line 6 only counts traditional, SEP and SIMPLE IRA balances. It does not include a 401(k), 403(b), or any other employer plan -- and it doesn't include Roth IRA balances either. That's the standard, fully legal workaround: if your employer's plan accepts incoming rollovers (most do -- check first), you can roll your pre-tax traditional IRA money into your 401(k) before doing the backdoor Roth. Once that money is out of any traditional/SEP/SIMPLE IRA, line 6 drops to $0, and a same-year nondeductible contribution converted right away lands back in the clean, 100%-tax-free case from Example 1. This has to happen before Dec 31 of the conversion year, since line 6 is a snapshot as of that date -- doing it in January after already converting in December doesn't undo the pro-rata math for that tax year.

What this doesn't cover

This is the federal pro-rata calculation only, as filed on Form 8606. It doesn't cover: the 5-year rule for Roth withdrawals, the once-a-year IRA rollover limit (conversions aren't subject to it, but other rollovers are), state tax treatment of the conversion, or the "mega backdoor Roth" (after-tax 401(k) contributions converted inside a 401(k) plan, which is a different mechanism with its own rules). It also doesn't model the rare timing rule on Form 8606 line 4 (nondeductible contributions made between Jan 1 and the following April 15 that are credited to the following tax year) -- enter your contribution as belonging to the year you're converting in, which is how a same-year backdoor Roth is normally done.

If the retirement question is really "Roth or traditional," not "how do I avoid pro-rata tax," the Roth vs traditional guide and the Roth vs traditional calculator compare what each leaves you after tax, by your tax rate now and in retirement.

Every number above comes from applying IRS Form 8606, Part I, lines 1 through 14 exactly, checked against three hand-worked scenarios built from the form's own instructions (irs.gov/pub/irs-pdf/f8606.pdf and i8606.pdf) -- a clean conversion, a $93,000-pre-tax-IRA case, and a case with basis carried forward from a prior year -- and cross-checked against the calculator's own code in 83 cases with 0 mismatches. Not tax advice; see the Form 8606 instructions and a tax professional for your actual return.