A worked example
The backdoor Roth, and what pro-rata does to it
Nadia, 45, single, earning $400,000, too much to put money into a Roth directly. She has $507,000 in traditional IRAs, $7,000 of which is a non-deductible contribution she made this year specifically to convert.
“Everyone says converting a non-deductible contribution is free. Is it? And what would emptying the whole IRA cost instead?”
What the projection shows
How much of each conversion actually comes out tax-free. Under §408(d)(2), the IRS treats all her traditional IRAs as one account, so the conversion recovers her after-tax basis in proportion to the total balance, not just the $7,000 she just put in. The basis isn't lost, just spread thin. The rule pools IRAs but not 401(k)s, so the last scenario shows the standard workaround: roll the $500k into her employer plan first, and the same $7,000 conversion comes out entirely tax-free.
What the projection also found
Nothing was missing from the inputs. These follow directly from the numbers above, under the assumptions this example uses.
- $7,000 was converted, no more than the after-tax basis on hand, but only $92 of it came out tax-free. The other $6,908 was taxable, because the IRS treats every traditional IRA as one account.
The planner opens with this household already filled in. Change the balances, the ages or the assumptions to match your own situation, then run it.
A projection based on stated assumptions. Not financial or tax advice.