A Backdoor Roth Conversion is a strategy used by high-income earners to contribute to a Roth IRA, even when their income ...

Using the pro-rata rule, the nontaxable portion of that conversion would be $6,250 (25% x $25,000), and the rest would be added to her taxable income for the year.

The pro-rata rule calculates how to divide your Roth conversion into its taxable and nontaxable segments. It starts by combining all of your traditional (non-Roth) IRAs to come up with a total basis.

Ignoring the Pro-Rata Rule – Failing to account for existing pre-tax IRA funds can result in unexpected taxes. Missing the 5-Year Rule – Withdrawals from converted funds within 5 years may ...

2. Your backdoor Roth IRA conversion may be subject to the pro-rata rule. A backdoor Roth IRA conversion is considered a distribution from the traditional IRA and a conversion deposit to the Roth IRA.

The Internal Revenue Service requires certain distributions from retirement accounts to be done on a pro rata basis, meaning in proportion to the way in which the account contributions were saved.

When you convert the $7,000 after-tax contribution into a Roth IRA, 96.6%, or $6,763, of the conversion amount is taxed as income in that tax year. Less than 4% is tax-free because of the pro-rata ...