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How to Avoid the Pro Rata Rule with Backdoor and Mega Roth Conversions

How To Avoid The Pro-Rata Rule

How to Avoid The Pro Rata Rule With Backdoor and Mega Roth Conversions

A Guide For Navigating The Tax Pitfalls Associated With Roth Conversions


Two of the most beneficial tax planning tools are Backdoor Roth IRA conversions and Mega Backdoor Roth conversions. If done correctly, they are excellent methods for moving pre-tax assets into a Roth account. The downside is that if not properly performed, you might be hit with an unwanted tax liability due to the Pro-Rata Rule.

What is a Backdoor Roth IRA Conversion?

Traditional IRA contributions are either deductible (pre-tax) or non-deductible (after-tax) depending on your level of income. Backdoor Roth IRA conversions are performed by making non-deductible after-tax contributions to a Traditional IRA account and then rolling those into a Roth IRA account. If you already have tax-deductible pre-tax contributions in your Traditional IRA and try to do a Backdoor Roth conversion, you might get hit with an unwanted tax bill due to the Pro-Rata Rule.


Let’s say that Billy currently has a Traditional IRA. Over 5 years, he made tax-deductible pre-tax contributions to this account in the amount of $35,000, which grows to $40,000.

Now he is looking to take advantage of backdoor Roth conversions and makes a non-deductible after-tax contribution of $7,000 to his Traditional IRA in hopes of doing a Roth Conversion. When he Makes the Roth conversion of $7,000, some of that amount will end up being taxable since he already has deductible pre-tax contributions in the IRA.

Pro Rata Rule effect diagram

What is a Mega Backdoor Roth Conversion?

The Pro-Rata Rule can also apply within the 401(k) when trying to make a Mega Backdoor Roth conversion. This rule becomes an issue for Mega Roth conversions when there are pre-tax and after-tax dollars within the 401(k). Often when an employee has maxed out their Pre-Tax 401(k) or Roth 401(k) and still wants to put some money into their workplace retirement account, they will make a contribution to the After-Tax 401(k) bucket.


Let’s say Stacy’s salary is $250,000, and she is currently maxing out her Pre-Tax 401(k) contributions at the maximum of $23,000 for 2024 (this is a 9.2% contribution from her salary). Her employer matches 100% of her contributions up to 6% of her salary for a total of $15,000.

For 2024 the IRS allows maximum annual additions in a defined contribution plan to be $69,000.

This leaves $31,000 that Stacy can still contribute to her 401(k) plan if she would like. Since she has already maxed out her salary deferrals in her Pre-Tax 401(k), she can put this money in as a contribution to the After-Tax 401(k) account.

This After-Tax account is where the Pro-Rata Rule can come into play. Say Stacy puts the $31,000 in the After-Tax account and it grows to $40,000. The $9,000 of growth is viewed by the IRS as pre-tax dollars. This is an issue because now Stacy has both pre-tax dollars of $9,000 and after-tax dollars of $31,000 in the same account.

The $9,000 of pre-tax dollars will have to be realized as income when a Mega Backdoor Roth conversion is made. Therefore, it is best to make your Mega Backdoor Roth conversions yearly to ensure that the taxable gain in the After-Tax account does not grow too large.

Pro Rata Rule Types of 401(k) Accounts diagram

What is the Pro-Rata Rule?

The Pro-Rata rule states that when a Traditional IRA or 401(k) contains both non-deductible after-tax funds and deductible pre-tax funds, each dollar withdrawn or converted from the IRA or 401(k) will contain a percentage of tax-free and taxable funds relative to the proportion those funds make up the account. This ratio is calculated based on the percentage of after-tax dollars in Traditional IRAs, SEP IRAs, and SIMPLE IRAs.

It is important to note that the pro-rata rule treats all IRAs as one IRA. This is referred to as the Aggregation Rule. Opening a new IRA account and making a nondeductible contribution does not avoid this rule.

Another common wrinkle is that even if you contribute to an after-tax 401(k) through your employer, the employer match of your funds must be placed in a non-Roth account. This means that if you try to convert your entire 401(k) account, you may owe taxes on the portion of the account from your employer’s matching contribution. The Secure Act 2.0 changed this limitation, but it is still yet to be seen in the majority of 401(k) plans.


How to Avoid the Pro-Rata Rule

In Billy’s example, he already has pre-tax dollars in his Traditional IRA account. To avoid the Pro-Rata Rule, he will first need to remove all the pre-tax money from the account. Typically, the best way to accomplish this is by rolling the pre-tax Traditional IRA balance into your current employer’s retirement plan.

When doing this, consult your current company’s employer plan to make sure they handle this transaction correctly. Once your Traditional IRA has been zeroed out, you are ready to make your backdoor Roth Conversions without having to pay taxes on the pre-tax dollars.

Mega Backdoor Roth conversions have many moving pieces and, if done incorrectly, can land you a massive tax bill. Please consult our article about Mega Roth Strategies for more information on navigating them.


Need Some Help?

If you’d like some help from one of our CPAs or CERTIFIED FINANCIAL PLANNER (CFP®) advisors regarding this strategy and how it applies to you, the Rhame & Gorrell Wealth Management team is here to help.

Our experienced Wealth Managers can help you review your financial and tax situation and come up with a custom tax optimization strategy going forward.

Feel free to contact us at (832) 789-1100, [email protected], or click the button below to ask a question or schedule your complimentary strategy session today.


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Tax Planning Manager
Clay grew up and went to high school in Roswell, Georgia. After High School, Clay attended Baylor University in Waco. While at Baylor, Clay was heavily involved with the local Waco youth through Young Life.

Clay graduated from Baylor with his Master's of Accounting in the winter of 2018. Clay took a job out of college with Deloitte working in the Multistate Tax Services group. While Clay loved the data analytics and research aspects of working at Deloitte, he realized that his skills were better used working with individuals directly. He took this passion and worked for a small Houston-based accounting firm, Cook, Johnston & Co. CPAs. At Cook, Johnston &Co., Clay worked on hundreds of individual and business tax returns. This included Income/Franchise tax, Payroll tax, and Sales tax returns. Working with his individual clients made Clay realize he would love to enter a career in financial services.

Clay has earned his Certified Public Accountant (CPA), Certified Financial Planner (CFP®), and Certified Investment Management Analyst (CIMA®) designations. He has also acquired his Personal Financial Specialist (PFS) designation.


Partner & Senior Wealth Manager
As a Wealth Manager, Kyle McClain serves on the Investment Committee, interfaces with clients, and coordinates ongoing financial planning initiatives. He also facilitates many marketing and business development functions for the firm.

Prior to joining RG Wealth, Kyle spent time with Fidelity Institutional Asset Management as an Investment Consultant and with Merrill Lynch as a Wealth Advisor. He graduated Magna Cum Laude with a dual degree in Finance and Economics from the University of Alabama. He also completed his CERTIFIED FINANCIAL PLANNER™ program at Texas A&M University, holds the CFP® designation, and has completed his Certified Investment Management Analyst (CIMA®) designation from the Yale School of Management.


Managing Director & Senior Wealth Manager

Jeff Rhame is one of the founders and President of Rhame & Gorrell Wealth Management. Jeff’s vision for starting Rhame & Gorrell was to deliver wealth management services and investment strategies typically available at the highest levels of wealth. Today, clients benefit from these sophisticated financial services, targeted to meet their unique needs.

Jeff leads a team of investment specialists that develop asset allocation strategies for high-net worth families. They seek out the most appropriate investment ingredients and then construct portfolios to meet our clients’ goals from income generation and capital preservation to tax-efficiency and growth.

Jeff has been honored with Top Professional’s Five Star Wealth Managers, recognized by The Wall Street Journal and Texas Monthly, for the last 10 years in a row and twice as Best of The Woodlands – Top Financial Advisors and Planners by Woodlands Online. For over 15 years, Jeff served as an adjunct professor for the University of Houston and Lone Star College Systems, teaching classes on Investment Management and Estate & Insurance Planning. As a member of the Financial Planning Association, he has also taught, and continues to teach, on & off-site retirement workshops for the employees of many Fortune 500 companies, such as ExxonMobil, Chevron.

Jeff is proudly serving as a member of three organizations: Memorial Hermann Hospital’s Advisory Board in The Woodlands, The Nelson Rusche College of Business Executive Advisory Board at Stephen F. Austin State University, and as the Vice-Chairman of the Tall Timbers District of The Boy Scouts of America.

Jeff received a degree in Accounting from Stephen F. Austin State University, and through post graduate work at The University of Houston, achieved his status as a CERTIFIED FINANCIAL PLANNER™ practitioner.




Rhame & Gorrell Wealth Management, LLC (“RGWM”) is an SEC registered investment adviser with its principal place of business in the State of Texas. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that RGWM has attained a certain level of skill, training, or ability.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction.  The effectiveness of any of the strategies described will depend on your individual situation and should not be construed as personalized investment advice.

For additional information about RGWM, including fees and services, send for our Firm Disclosure Brochures as set forth on Form ADV Part 2A and Part 3 by contacting the Firm directly. You can also access our Firm Brochures at www.adviserinfo.sec.gov. Please read the disclosure brochures carefully before you invest or send money.

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