Doing a Backdoor Roth IRA? Watch Out for the 'Pro-Rata Rule' Trap That Could Cost You Thousands

Doing a Backdoor Roth IRA?

You earn too much to contribute directly to a Roth IRA (over $168,000 for singles in 2026). So, you use the famous "Backdoor Roth" strategy:

1. Contribute $7,500 to a Traditional IRA (Non-Deductible).
2. Immediately convert it to a Roth IRA.
3. Enjoy tax-free growth forever.

It sounds perfect. But then, you get a tax bill for nearly $2,000. Why? Because you ignored the IRS Pro-Rata Rule.

---

The "Coffee and Cream" Analogy

The IRS treats all your Traditional IRAs as one big bucket (known as the Aggregation Rule). You cannot just convert the "new" after-tax money you just put in. You must convert a proportionate mix of your pre-tax and after-tax money.

Think of your IRA as a cup of coffee:

• Coffee (Pre-Tax Money): Old 401(k) rollovers, deductible contributions from years ago.
• Cream (After-Tax Money): The new $7,500 you just added.

Once you pour the cream into the coffee, you can't spoon just the cream back out. You have to take a sip of the mixture.

---

The Calculation Trap

🧮 The Math of Misery (2026 Example)

Scenario:

• You have an old Rollover IRA with $92,500 (Pre-Tax).
• You add $7,500 (After-Tax) for the 2026 Backdoor Roth.
• Total Balance: $100,000.

The Rule: Only 7.5% of your money is "After-Tax" ($7,500 / $100,000). Therefore, 92.5% of your conversion is TAXABLE.

If you convert your $7,500, the IRS says $6,937 of it is taxable income. You just created a tax bill you didn't expect.

---

How to Fix It (Empty the Bucket)

To do a Backdoor Roth tax-free, you must have $0 in all Pre-Tax IRAs on December 31st of the conversion year.

The Solution: "Reverse Rollover"

If your current employer's 401(k) plan allows it, roll your old Pre-Tax IRA money into your 401(k). The Pro-Rata rule does NOT look at 401(k) balances.

• Step 1: Move $92,500 from IRA to 401(k).
• Step 2: Now your IRA balance is $0 (Pre-Tax) + $7,500 (After-Tax).
• Step 3: Convert the $7,500. It is now 100% tax-free.

---

Chief Editor’s Verdict

The Backdoor Roth is a powerful tool, but it requires a clean slate.

Before you attempt it, check your other accounts. If you have an old SEP-IRA, SIMPLE IRA, or Rollover IRA sitting around, you are walking into a trap. Hide that money in a 401(k) first.

Disclaimer: This article is for informational purposes only and does not constitute professional tax or financial advice. Tax laws and contribution limits (2026: $7,500) are subject to change. Always consult with a qualified CPA or tax professional regarding your specific situation and the Pro-Rata Rule.