For the uninitiated: The pro-rata rule is an IRS regulation that dictates how withdrawals and conversions from traditional IRAs are taxed when your account contains both pre-tax (deductible) and after-tax (non-deductible) contributions.
The term “pro rata” is Latin for “in proportion”, and proportion is exactly what this rule enforces.
When you withdraw or convert money from a traditional IRA that contains mixed funds, you cannot selectively access only the after-tax dollars.
Instead, every dollar distributed must contain a proportionate mix of pre-tax and after-tax money based on the ratio across all your traditional IRAs, SEP IRAs, and SIMPLE IRAs combined.
The IRS treats these accounts as one aggregated pool, regardless of how many separate accounts you maintain or which custodians hold them.
For high-income physicians pursuing backdoor Roth IRA conversions, this is important. Many doctors assume that making a non-deductible contribution to a traditional IRA and immediately converting it to a Roth results in a tax-free transaction.
After all, you already paid taxes on that contribution.
But if you have any other traditional IRA balances containing pre-tax money, the pro-rata rule ensures that most of your conversion will be taxable, often creating an unexpected tax bill that undermines the entire strategy.
In case you missed it: Backdoor Roth vs Taxable Investing for High Earners
How the IRS Calculates Your Tax Liability
The pro-rata rule applies specifically to distributions and conversions from traditional retirement accounts.
When you have both deductible (pre-tax) and non-deductible (after-tax) contributions in your traditional IRA, you cannot choose which type of money to withdraw or convert first. The IRS requires that each distribution contain a proportionate amount of both types of funds.
This requirement exists to prevent taxpayers from manipulating the tax system by selectively accessing tax-free basis while leaving taxable funds untouched.
The pro-rata rule ensures that the tax treatment of IRA distributions maintains the proper ratio of pre-tax to after-tax money across all traditional IRA accounts.
The calculation follows a straightforward formula established by the IRS in Form 8606 instructions:
(Total after-tax contributions) ÷ (Total of all traditional IRA balances) = Non-taxable percentage (the pro rata)
(Distribution or conversion amount) × (Non-taxable percentage) = Non-taxable amount
(Distribution or conversion amount) × (100% – Non-taxable percentage) = Taxable amount
Consider a cardiologist with $95,000 in a rollover IRA from a previous employer (entirely pre-tax money). She makes a $7,000 non-deductible contribution to a traditional IRA this year, intending to immediately convert it to a Roth IRA via the backdoor strategy.
Her total traditional IRA balance is now $102,000 ($95,000 + $7,000). Her non-taxable percentage is $7,000 ÷ $102,000 = 6.86%.
When she converts the $7,000, only 6.86% of it ($480) is non-taxable. The remaining 93.14% ($6,520) is taxable at her ordinary income rate.
At a 35% marginal tax bracket, this conversion costs approximately $2,282 in federal taxes, which is the opposite of the tax-free conversion she anticipated.
After the conversion, she has $7,000 in her Roth IRA and $95,000 remaining in her traditional IRA. To be clear, her traditional IRA still contains $6,520 of after-tax basis (the portion of her original $7,000 contribution that wasn't converted). This basis carries forward and factors into all future pro-rata calculations.
Why High-Income Physicians Frequently Encounter Pro-Rata Issues
The pro-rata rule is particularly relevant for physicians because of specific factors that affect high-income professionals.
The income limits for 2026, physicians earning above $153,000 (single) or $242,000 (married filing jointly) cannot contribute directly to a Roth IRA, making the backdoor Roth conversion strategy essential for accessing Roth benefits.
Most attending physicians earn well above these thresholds.
The Medscape Physician Compensation Report consistently shows that physicians across most specialties earn between $265,000 and $564,000 annually, placing them squarely in the income range where backdoor Roth conversions become necessary.
Also read: Physician Compensation 2025: Modest Gains and Deeper Financial Pressures
Beyond income levels, physicians often maintain both W-2 employment and 1099 independent contractor work. This leads to various retirement account types that fall under pro-rata calculations.
A hospitalist might have a 403(b) from their primary employer while also maintaining a SEP IRA for moonlighting income.
Physicians who establish private practices or maintain significant self-employment income frequently use SEP IRAs or SIMPLE IRAs.
These accounts offer substantial contribution limits (up to $72,000 for SEP IRAs in 2026) making them attractive vehicles for retirement savings.
However, these same accounts create exactly the mixed-money situation that triggers pro-rata taxation when attempting backdoor Roth conversions.
The IRS Aggregation Rule: Why Multiple Accounts Don't Help
For pro-rata purposes, IRS regulations treat all your traditional IRAs, SEP IRAs, and SIMPLE IRAs as a single account. This means opening a new IRA at a different custodian doesn't create a separate pro-rata calculation.
Contributing to one IRA and converting from a different IRA doesn't avoid pro-rata. The physical separation of accounts is irrelevant to the tax treatment.
An emergency medicine physician with a $200,000 SEP IRA at Vanguard opens a new traditional IRA at Fidelity, makes a $7,000 non-deductible contribution there, and converts it the next day, thinking he's created a clean backdoor Roth conversion. He hasn't.
The IRS aggregates both accounts, making his non-taxable percentage only $7,000 ÷ $207,000 = 3.38%. His conversion is 96.62% taxable.
The aggregation rule specifically includes traditional IRAs, SEP IRAs, and SIMPLE IRAs.
It does not include 401(k) or 403(b) accounts (employer-sponsored plans), Roth IRAs, inherited IRAs, or 457(b) plans.
This distinction becomes the foundation for most pro-rata avoidance strategies that physicians use to execute clean backdoor Roth conversions.
Common Misconceptions About Pro-Rata Taxation
The belief that pro-rata taxation represents double taxation is the most frequent complaint and reflects a misunderstanding of what's actually happening.
You're not being double taxed; you're actually converting a proportionate share of your after-tax contributions.
If your non-taxable percentage is 7% and you convert 10% of your total IRA balance, you're also converting 10% of your after-tax contributions. The remaining 90% of your after-tax contributions stays in your traditional IRA, maintaining the same 7% ratio.
The IRS is simply ensuring that pre-tax and after-tax money move proportionally.
Many people believe that converting immediately after making a non-deductible contribution avoids pro-rata calculations. Timing is irrelevant to pro-rata calculations.
Whether you convert one day or one year after making your non-deductible contribution makes no difference. The rule applies based on your account balances as of December 31st of the conversion year, as specified in Form 8606 instructions.
Another misconception is that pro-rata only matters for conversions. The pro-rata rule applies to any distribution from a traditional IRA containing both pre-tax and after-tax money. Regular withdrawals in retirement follow identical proportional taxation.
The rule becomes most visible during backdoor Roth conversions because that's when high-income physicians are actively trying to isolate after-tax money, but it governs all IRA distributions.
Some physicians believe each conversion is calculated separately. All conversions within a single tax year are aggregated for pro-rata purposes.
If you make multiple backdoor Roth conversions throughout the year, the IRS calculates the taxable portion based on your total conversions relative to your December 31st IRA balance.
The Reverse Rollover
Moving pre-tax money from traditional IRAs, SEP IRAs, or SIMPLE IRAs into an employer-sponsored 401(k) or 403(b) is the most common solution for physicians facing pro-rata complications.
That's because 401(k) and 403(b) accounts are not included in the IRA aggregation rule. Once you move your pre-tax IRA money into a 401(k), those funds are no longer counted when calculating the pro-rata percentage for IRA conversions.
A hospitalist has $150,000 in a rollover IRA from her residency program's 403(b). She contacts her current employer's 401(k) administrator, confirms they accept incoming rollovers, and completes the transfer.
Once her IRA balance is zero, she can execute backdoor Roth conversions with no pro-rata complications because she has no traditional IRA, SEP IRA, or SIMPLE IRA balances remaining.
The implementation process requires several steps.
First, verify your employer plan accepts incoming rollovers (not all plans do). Contact your plan administrator and ask specifically about accepting rollovers from traditional IRAs and SEP IRAs. Many 401(k) plans accept these rollovers, but some have restrictions or don't allow them at all.
Second, understand any restrictions the plan imposes. Some plans limit investment options to a specific menu of mutual funds.
Others charge administrative fees that exceed typical IRA costs. Review the plan's investment options and fee structure before proceeding.
In most cases, the benefit of clearing your IRA for clean backdoor Roth conversions outweighs limited investment selection, but this requires individual assessment.
Third, evaluate withdrawal rules. Some 401(k) plans don't allow in-service distributions, potentially locking up your money until you leave the employer.
If you might need access to these funds before retirement or before leaving your current job, understand the plan's distribution rules before completing the rollover.
Once you've verified these details and decided to proceed, complete rollover paperwork with both the IRA custodian and 401(k) administrator. Request a direct trustee-to-trustee transfer to avoid any withholding or 60-day rollover concerns. Confirm the transfer is complete before making backdoor Roth contributions.
Most importantly, ensure the rollover completes before December 31st of the year you want it to count toward your pro-rata calculation.
Also, keep in mind that 401(k) balances receive different creditor protection than IRAs in some states.
Under federal law, 401(k) accounts receive unlimited bankruptcy protection under ERISA, while IRAs are protected up to approximately $1.7 million (adjusted for inflation every 3 years). Some states offer stronger IRA protection, while others offer weaker protection.
If asset protection is a significant concern in your situation, consult with an attorney familiar with your state's laws before moving IRA money into a 401(k).
Learn more: Should You Invest in a SEP IRA or Solo 401(k)? Everything You Need to Know
The Solo 401(k) Strategy for Self-Employed Physicians
Physicians with self-employment income but no employees (or only a spouse as an employee) can establish a solo 401(k) and roll their SEP or traditional IRA balances into it.
According to IRS rules on solo 401(k) plans, these plans offer the same rollover capabilities as employer-sponsored plans but with greater control and often lower administrative burden.
An anesthesiologist earns $80,000 annually from 1099 locum tenens work in addition to her W-2 salary. She has a $180,000 SEP IRA from years of self-employment savings.
She establishes a solo 401(k) through a provider like Fidelity or Charles Schwab and rolls her SEP IRA into the solo 401(k). Her SEP IRA balance becomes zero, enabling clean backdoor Roth conversions.
Solo 401(k) plans accept rollovers from traditional and SEP IRAs. They offer higher contribution limits than SEP IRAs for some income levels because they allow both employee deferrals (up to $24,000 in 2026) and employer profit-sharing contributions (up to 25% of compensation). This dual contribution structure can result in higher total contributions compared to SEP IRAs, which are limited to employer contributions only.
Solo 401(k) plans also provide potential for mega backdoor Roth contributions if the plan document permits after-tax contributions beyond the standard limits.
Some providers offer plan documents that include this feature, allowing physicians with significant self-employment income to contribute additional after-tax money that can be converted to a Roth.
The plans maintain separation from employer-sponsored plans. If you have a 401(k) at your primary W-2 employer, you can still establish a solo 401(k) for your self-employment income. The contribution limits coordinate across both plans.
Although your total employee deferrals cannot exceed $24,000 across all plans, employer profit-sharing contributions are calculated separately for each business.
You must have self-employment income to establish a solo 401(k).
This includes 1099 income from locum tenens work, consulting, expert witness testimony, speaking fees, or any other independent contractor income reported on Schedule C or via partnership/S-corporation distributions.
You cannot have any full-time employees (except a spouse).
Part-time employees working under 1,000 hours annually don't disqualify you, but once you hire a full-time employee, you can no longer maintain a solo 401(k) and must transition to a standard 401(k) with broader eligibility requirements.
Also read: Best Retirement Savings Plans for the Self-Employed
Strategic Roth Conversion of All IRA Assets
Converting your entire traditional IRA balance to Roth eliminates pro-rata concerns permanently. This works best during years with reduced income or substantial deductions that offset the conversion's tax impact.
While you'll pay ordinary income tax on the converted amount, you clear your IRA space for all future backdoor Roth conversions without pro-rata complications.
Years taking unpaid leave or sabbatical present optimal timing.
A physician reducing from full-time to part-time work earns lower income that year, potentially dropping from the 35% or 37% federal tax bracket into the 24% or 32% bracket. Converting IRA assets during this lower-income period reduces the tax cost while achieving the strategic goal of clearing IRA balances.
Transition years between training and attending positions can also work well, particularly if you have signing bonuses or relocation expenses creating deductions.
New attending physicians often receive substantial signing bonuses along with relocation expense reimbursement.
While the bonus increases taxable income, relocation expenses and the fact that you may have worked only part of the year as an attending can create a window where your effective tax rate is lower than future years.
Early retirement years, before required minimum distributions begin but after earned income ceases, represent another optimal conversion period.
Physicians who retire in their late 50s or early 60s may have several years of lower income before Social Security benefits and RMDs begin at age 73, or 75 for those born in 1960 or later (per the SECURE Act 2.0). These years offer opportunities to convert traditional IRA assets at lower tax rates while filling up tax brackets strategically.
Years with significant carry-forward losses from other sources can offset conversion income. If you have capital loss carryforwards, business losses, or other deductions that exceed your income, you might convert IRA assets with minimal or no tax impact.
This requires careful tax planning to ensure you're utilizing losses effectively.
Calculate the incremental tax cost of the conversion before proceeding. The conversion adds to your ordinary income, potentially pushing you into higher tax brackets.
Use tax projection software or work with a CPA to model the exact tax impact. Consider state income tax implications as some states don't tax Roth conversions, while others fully tax them at ordinary income rates.
Evaluate whether the conversion pushes you into higher Medicare premium brackets. The Income-Related Monthly Adjustment Amount (IRMAA) applies additional Medicare Part B and Part D premiums based on modified adjusted gross income from two years prior.
For 2026, IRMAA brackets begin at $109,000 (single) and $218,000 (married filing jointly), based on 2024 income. A large Roth conversion could trigger IRMAA surcharges two years later, adding to the total cost of the conversion.
Source: Medicare
Assess impacts on other income-tested benefits or deductions. Higher modified adjusted gross income can phase out various deductions and credits, potentially making a large conversion more expensive than the nominal tax rate suggests.
Ensure you have cash available to pay the tax without withdrawing from retirement accounts as paying conversion taxes by withdrawing from the IRA itself defeats the purpose and triggers additional taxes and potential penalties.
Accepting Pro-Rata When It Favors You
For physicians with relatively small traditional IRA balances or those planning substantial Roth conversions anyway, accepting pro-rata taxation may be the simplest approach.
This decision requires comparing the tax cost of converting existing IRA balances against the administrative burden of managing pro-rata calculations indefinitely.
A family medicine physician has $18,000 in a traditional IRA but lacks access to an employer 401(k) that accepts rollovers. She plans to make backdoor Roth contributions for herself and her spouse ($14,000 total annually) for the next 25 years.
Rather than maintaining pro-rata calculations indefinitely, she converts her entire $18,000 IRA to Roth, pays approximately $6,300 in tax (at a 35% rate), and proceeds with clean conversions going forward
The break-even analysis compares paying $6,300 once versus tracking basis and calculating pro-rata taxation on $14,000 annual conversions for 25 years.
Each year with pro-rata complications requires Form 8606 preparation for both spouses, basis tracking, and calculation of the taxable portion of conversins. The administrative simplicity and avoiding decades of tax form complexity make the upfront conversion worthwhile
This approach works best when the traditional IRA balance is relatively small compared to planned future contributions. If you have $200,000 in a traditional IRA, converting it all simply to avoid pro-rata calculations likely doesn't make sense as the tax cost would be substantial.
But if you have $10,000 to $30,000 in traditional IRA assets, the one-time tax payment to clear pro-rata complications permanently often proves worth it.
Form 8606
Once you have after-tax contributions in any traditional IRA, you must file Form 8606 with your tax return every year you make non-deductible contributions, take distributions, or make conversions.
This form reports non-deductible contributions made during the year, tracks your cumulative basis (total after-tax contributions), calculates the pro-rata split for any distributions or conversions, and determines your remaining basis going forward.
File Form 8606 for every year you make a non-deductible contribution, even if you don't convert it that year. The form establishes your basis on record with the IRS.
Maintain copies of all Form 8606s permanently as you'll need historical data to prove your basis when you eventually take distributions in retirement, potentially decades from now.
Failure to file Form 8606 when making non-deductible contributions means the IRS assumes all IRA money is pre-tax.
This error results in actual double taxation as you pay tax on the contribution (since it wasn't deductible) and pay tax again on distribution because you never documented the basis. The IRS provides a process for correcting this error, but it requires filing amended returns and a statement explaining the correction.
The December 31st balance on Form 8606 Line 6 should include all traditional, SEP, and SIMPLE IRA balances, including the value of any ongoing conversions.
This is where many preparers make errors by failing to include all accounts or using incorrect year-end values. The form requires adding back any distributions or conversions you made during the year to arrive at your year-end balance, creating a complete picture of your total traditional IRA holdings for the pro-rata calculation.
Disclaimer: This article is provided for educational and informational purposes only and does not constitute professional financial, tax, or legal advice. The pro-rata rule and backdoor Roth IRA strategies involve complex tax regulations that can have significant financial implications based on your individual circumstances.
The information presented in this article should not be relied upon as a substitute for professional advice from a qualified Certified Public Accountant (CPA), Certified Financial Planner (CFP), tax attorney, or other licensed financial professional. Tax laws, IRS regulations, and contribution limits change regularly, and the strategies discussed here may not be appropriate for your specific situation.
Before implementing any of the strategies discussed in this article, you should:
- Consult with a qualified CPA or tax professional who can evaluate your complete financial picture
- Verify that current tax laws and IRS regulations support the strategy you're considering
- Review your specific retirement account balances, income sources, and tax situation with a professional
- Understand the potential tax consequences, penalties, and reporting requirements for your individual circumstances
- Ensure proper completion and filing of all required tax forms, particularly Form 8606
Individual results may vary, and past tax treatment does not guarantee future tax treatment. State tax laws vary significantly and may affect the strategies discussed in this article.
Always seek personalized guidance from certified professionals before making any decisions regarding retirement account conversions, rollovers, contributions, or distributions. The complexity of the pro-rata rule and its interaction with various retirement account types requires expert analysis tailored to your unique financial situation.
Frequently Asked Questions
What is the pro-rata rule in simple terms?
The pro-rata rule requires that withdrawals or conversions from traditional IRAs containing both pre-tax and after-tax money must include a proportionate mix of both types. You cannot selectively withdraw only after-tax contributions. The IRS calculates the percentage of after-tax money across all your traditional, SEP, and SIMPLE IRAs combined, then applies this percentage to any distribution or conversion you make.
Can I avoid the pro-rata rule by opening a new IRA at a different bank?
No, opening a new IRA at a different custodian does not avoid the pro-rata rule. The IRS aggregates all your traditional IRAs, SEP IRAs, and SIMPLE IRAs regardless of where they're held. The physical separation of accounts at different institutions is irrelevant to the tax treatment. The IRS views all these accounts as one pool of money for pro-rata purposes.
How do I calculate my pro-rata percentage?
Calculate your pro-rata percentage by dividing your total after-tax contributions (basis) by the total value of all your traditional, SEP, and SIMPLE IRAs as of December 31st. The formula is: (Total after-tax contributions) ÷ (Total IRA balance) = Non-taxable percentage. Then multiply any distribution or conversion by this percentage to determine the non-taxable portion.
What happens if I don't report my non-deductible IRA contributions on Form 8606?
Failing to report non-deductible contributions on Form 8606 means the IRS has no record of your after-tax basis. When you eventually take distributions or conversions, the IRS will assume all your IRA money is pre-tax and will tax the entire amount. This results in double taxation — you paid tax when you made the non-deductible contribution, and you'll pay tax again on distribution. The IRS allows you to correct this by filing amended returns with Form 8606, but it's far better to file correctly from the start.
Can I convert only my after-tax IRA contributions to a Roth IRA?
No, you cannot selectively convert only your after-tax contributions. The pro-rata rule requires that every conversion include a proportionate mix of pre-tax and after-tax money based on your total IRA balances. This is true even if you have separate IRAs containing only after-tax contributions — the IRS aggregates all traditional IRAs for the calculation.
How does the pro-rata rule affect backdoor Roth IRA conversions?
The pro-rata rule makes backdoor Roth conversions partially taxable if you have other traditional IRA balances containing pre-tax money. Many high-income physicians assume their backdoor Roth conversion will be tax-free because they made a non-deductible contribution. However, if they have pre-tax money in other IRAs, most of the conversion will be taxable. This is the most common pro-rata issue physicians encounter.
What's the best way for doctors to avoid pro-rata issues?
The most effective solution is rolling pre-tax traditional IRA money into an employer-sponsored 401(k) or 403(b), or establishing a solo 401(k) if you have self-employment income. Once your traditional IRA balance is zero, you can make backdoor Roth contributions without any pro-rata complications. This is a one-time action that clears the way for clean conversions indefinitely.
Do inherited IRAs count toward the pro-rata rule?
No, inherited IRAs do not count toward pro-rata calculations. The IRS treats inherited IRAs separately from your own retirement accounts. Only traditional IRAs, SEP IRAs, and SIMPLE IRAs that you own personally count toward your pro-rata calculation. This means you can maintain an inherited IRA without affecting your ability to execute clean backdoor Roth conversions.
When is the pro-rata calculation determined each year?
The pro-rata calculation uses your IRA balance as of December 31st of the year you make the conversion. This means you can make conversions early in the year and still address pro-rata issues by December 31st. For example, you could make a backdoor Roth conversion in January and then roll your traditional IRA into your 401(k) in November, making the January conversion tax-free based on your zero December 31st IRA balance.
What if I made a backdoor Roth conversion before learning about the pro-rata rule?
If you've already made a conversion without realizing the pro-rata implications, you'll need to report the taxable portion on your tax return using Form 8606. The conversion cannot be undone or recharacterized under current tax law. However, you can take steps going forward to address the pro-rata issue for future conversions by rolling your remaining traditional IRA balance into a 401(k) or solo 401(k).
Does the pro-rata rule apply differently in different states?
The pro-rata rule itself is a federal tax regulation that applies uniformly across all states. However, state income tax treatment of Roth conversions varies. Some states fully tax conversions as ordinary income, while others have no state income tax. A few states offer partial exemptions. This affects the total tax cost of conversions but doesn't change how the federal pro-rata rule calculates the taxable portion.
How far back can the IRS audit my Form 8606?
Generally, the IRS has three years from when you filed your return to audit it. However, if you fail to file Form 8606 when required, there's no statute of limitations on assessing additional tax. This is why maintaining copies of all Form 8606 forms permanently is crucial — you need to be able to prove your basis even decades later when you take distributions in retirement.
