🚪 The Pro Rata Rule: What High Earners Need to Know Before Doing a Backdoor Roth

If your income is too high to contribute directly to a Roth IRA, you’ve probably heard of the “Backdoor Roth” strategy.

And yes, it’s legal.

But there’s one rule that can quietly create a surprise tax bill:

The Pro Rata Rule.

If your MAGI is high and you have money sitting in traditional IRAs, this matters.

🧾 Quick Refresher: Why the Backdoor Roth Exists

The Tax Cuts and Jobs Act didn’t create the Backdoor Roth, but income limits for direct Roth contributions have been around for years.

If your Modified Adjusted Gross Income (MAGI) is above the IRS threshold, you cannot contribute directly to a Roth IRA.

So people do this instead:

1. Contribute to a Traditional IRA (non-deductible).

2. Convert that money to a Roth IRA.

3. Pay little or no tax on the conversion.

Simple… in theory.

But the Pro Rata Rule changes the math.

📊 What Is the Pro Rata Rule?

The Pro Rata Rule says:

When you convert money from a Traditional IRA to a Roth IRA, the IRS looks at all of your traditional, SEP, and SIMPLE IRA balances combined.

Not just the new contribution.

It treats your IRAs as one big bucket.

And it forces the conversion to be proportional between:

• Pre-tax money

• After-tax (non-deductible) money

You cannot isolate just the after-tax portion.

🧮 Example (This Is Where It Hits)

Let’s say:

• You have $94,000 in a pre-tax Traditional IRA from an old 401(k) rollover.

• You contribute $6,000 non-deductible to a Traditional IRA.

• Total IRA balance = $100,000.

You then convert $6,000 to a Roth IRA.

You might think:
“That $6,000 was after-tax, so I won’t owe anything.”

But under the Pro Rata Rule:

Only 6% of your total IRA is after-tax.

So:

• 6% of the conversion is tax-free.

• 94% is taxable.

That means roughly $5,640 of your $6,000 conversion is taxable income.

That’s not what most people expect.

🚨 Who This Affects Most

High-income nurses who:

• Rolled old 401(k)s into Traditional IRAs.

• Have SEP IRAs from side businesses.

• Have SIMPLE IRAs.

• Think they can “just” do a Backdoor Roth each year.

If you have zero pre-tax IRA money?
The Backdoor Roth is usually clean.

If you have pre-tax IRA money?
You need to pause.

🧠 Why Employer Plans Are Different

The Pro Rata Rule does NOT include:

• 401(k)s

• 403(b)s

• 457 plans

Only Traditional, SEP, and SIMPLE IRAs count.

That’s why some high earners move pre-tax IRA money into a current 401(k) plan before doing a Backdoor Roth.

But that move depends on:

• Whether your employer plan allows roll-ins.

• The investment quality inside that plan.

• Your broader strategy.

This is not a blind step.

📌 What To Do If Your MAGI Is High

If you’re over the Roth income limit, ask:

1. Do I have any pre-tax IRA balances?

2. Do I have a SEP or SIMPLE IRA?

3. What is my total IRA balance as of December 31?

The Pro Rata Rule uses your total IRA balance at year-end.

Not the day you convert.

Timing matters.

💬 The Coaching Perspective

This is one of those areas where people read one Reddit thread and assume it’s easy. Sometimes it is.

Sometimes it triggers unexpected taxable income.

At NurseMoneyDate®, this is where education and sequencing matter.

We zoom out:

• What’s your MAGI?

• What accounts do you already have?

• Is Roth even the right priority?

• Are you maxing employer matches first?

• Are you carrying high-interest debt?

Because a Backdoor Roth is an advanced strategy.

And advanced strategies only work when the basics are handled.

The Pro Rata Rule isn’t scary.

It’s just math.

But if you don’t understand the math before converting, it can turn a “tax-free strategy” into a surprise tax bill.

And that’s not the kind of surprise we want.