A $7,000 non-deductible contribution converted the same year is completely tax-free, as long as it's the only traditional IRA money you have. The pro-rata rule, §408(d)(2), treats all your traditional, SEP and SIMPLE IRAs as one account, so the conversion is only tax-free in proportion to your after-tax basis across all of them.
With $10,000 sitting in an old rollover IRA, 58.8% of that contribution is taxable. With $500,000, it's 98.6%, and the step that's usually described as free costs $1,657 in the 24% bracket.
The pre-tax balance is everything in traditional, SEP and SIMPLE IRAs on December 31. Employer plans like a 401(k) don't count.
| Existing pre-tax IRA | Converts tax-free | Taxable | Tax at 22% | at 24% | at 32% |
|---|---|---|---|---|---|
| $0 | $7,000.00 | $0.00 (0.0%) | $0.00 | $0.00 | $0.00 |
| $10,000 | $2,882.35 | $4,117.65 (58.8%) | $905.88 | $988.24 | $1,317.65 |
| $25,000 | $1,531.25 | $5,468.75 (78.1%) | $1,203.12 | $1,312.50 | $1,750.00 |
| $50,000 | $859.65 | $6,140.35 (87.7%) | $1,350.88 | $1,473.68 | $1,964.91 |
| $100,000 | $457.94 | $6,542.06 (93.5%) | $1,439.25 | $1,570.09 | $2,093.46 |
| $250,000 | $190.66 | $6,809.34 (97.3%) | $1,498.05 | $1,634.24 | $2,178.99 |
| $500,000 | $96.65 | $6,903.35 (98.6%) | $1,518.74 | $1,656.80 | $2,209.07 |
| $1,000,000 | $48.66 | $6,951.34 (99.3%) | $1,529.29 | $1,668.32 | $2,224.43 |
Notice that the cost doesn't creep up gradually as the rollover grows. It shows up almost immediately. Just $10,000, one small old 401(k) rollover, already makes 58.8% of the contribution taxable. After that the curve flattens out because there isn't much tax-free portion left to lose.
The taxable portion counts as ordinary income in the year you convert, so it stacks on top of everything else that year. It can push capital gains out of the 0% bracket or raise the income Medicare uses to set your premium two years later. The planner runs it against your actual year instead of a single rate from a table.
A $7,000 non-deductible contribution converted in the same year, with the stated balance already sitting in traditional, SEP or SIMPLE IRAs. §408(d)(2) treats them all as one account, so the conversion is tax-free only in proportion to the basis behind it.
Employer plan balances (401(k), 403(b)) are not counted in the pro-rata fraction; only IRAs are. The figures assume the contribution and conversion happen in the same tax year and that no other distribution is taken.
Rule: IRC §408(d)(1)-(2), reported on Form 8606 Part I. Calculated by the same code the planner uses, and checked against it by a test.
This is a projection based on stated assumptions. It is not financial or tax advice. Whether you can roll an old IRA into an employer plan to avoid this is a question for whoever prepares your tax return.