Allocation · 2025 and 2026

How the IRS Pro-Rata Rule Works: IRC § 408(d)(2) and Form 8606

Published by Moss Ladder · Updated October 17, 2026 · Editorial policy

Executive summary

After-tax IRA basis is recovered proportionally across the owner's relevant annual IRA transactions. The calculation uses all applicable accounts and the year-end snapshot, not just the account chosen for a Roth conversion. The three examples below isolate a clean conversion, a conversion with pre-tax assets left behind, and a conversion that includes a small gain.

Educational guidance for ordinary scenarios. Check the official form's year and filing branches and obtain advice for your actual records.

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Aggregation comes before the account-level story

IRC § 408(d)(2) treats the owner's individual retirement accounts as one contract when applying the distribution rules and generally combines distributions for the year. Form 8606 implements the annual basis allocation. Traditional SEP and traditional SIMPLE IRAs generally belong in the owned traditional IRA pool. A brokerage label such as rollover IRA or backdoor IRA does not create a separate tax category. An account held at Fidelity and an account held at Vanguard are still part of the same owner's analysis when the rules apply.

This is often explained as cream mixed into coffee: basis and pre-tax dollars cannot be selected merely by choosing an account number. The analogy has limits, because the form also has precise timing and excluded-transaction rules. Do not use it to decide how an inherited IRA, QCD, repayment or IRA-to-plan rollover must be reported. Your spouse has a separate pool. Roth IRA balances themselves do not enter the traditional IRA denominator, and an employer 401(k) that remains in the plan is not a traditional IRA balance.

Build the numerator without duplicating basis

For the ordinary Part I calculation, line 1 contains the current tax year's nondeductible traditional IRA contributions. Line 2 brings forward earlier unrecovered basis. Line 3 adds them. Line 4 identifies the portion of line 1 paid after December 31 but designated for that contribution year; subtracting it produces line 5. That timing adjustment prevents a later contribution from sheltering a distribution that occurred before those contribution dollars were in the IRA. Basis is not simply every deposit ever made to an IRA.

A deduction previously taken normally means those contribution dollars did not create after-tax basis. Employer pre-tax contributions and pre-tax rollover money do not create nondeductible basis either. When records are incomplete, use prior returns and contribution evidence to reconstruct the history before entering a figure. Do not put the same $7,000 on both prior basis and current-year contribution because two documents mention it. Reconcile line 14 from the last applicable Form 8606 and any intervening contributions or recoveries.

Build the denominator from the annual facts

Line 6 generally contains applicable December 31 IRA value plus relevant outstanding rollovers. Line 7 includes the other distributions covered by Part I, and line 8 includes net conversions. Adding lines 6, 7 and 8 gives line 9. The conversion must remain in that pool even if the IRA was emptied by converting it. Do not enter a pre-conversion account value as the year-end field or add the conversion twice. The website's separate account fields are aggregated before applying the unchanged engine.

Line 10 is line 5 divided by line 9, capped at one. The form requires at least three decimal places; the preview shows six below one and 1.000 at the cap, while internal arithmetic retains more precision. Line 11 applies the ratio to conversions and line 12 applies it to relevant other distributions. Line 13 totals basis recovered, and line 14 preserves what remains. Taxable conversion is then conversion less its allocated tax-free amount. The separate estimated federal tax uses the selected tax assumptions.

Example A: all basis, no year-end IRA value

This invented example assumes one taxpayer, documented basis, eligible ordinary transactions, no special repayment and no tax withholding. Dollar amounts are planning values. Use the official form's filing branches; a displayed line is not automatically a required entry on a filed return. The 2026 examples apply published 2026 contribution limits with the 2025 allocation structure.

Example A: all basis, no year-end IRA value
Form 8606 line	Modeled amount
1	$7,000.00
2	$0.00
3	$7,000.00
4	$0.00
5	$7,000.00
6	$0.00
7	$0.00
8	$7,000.00
9	$7,000.00
10	1.000
11	$7,000.00
12	$0.00
13	$7,000.00
14	$0.00
16	$7,000.00
17	$7,000.00
18	$0.00
15a	$0.00
15b	$0.00
15c	$0.00

Example B: a conversion that is 75% taxable

Assume $7,000 basis is available, $7,000 is converted and $21,000 remains across applicable IRAs at year end. There are no other distributions, late contributions or outstanding rollovers. The denominator is $21,000 plus $7,000, or $28,000. Dividing $7,000 by $28,000 produces 0.250000. The conversion uses $1,750 basis and includes $5,250 taxable income. The other $5,250 basis remains available for future allocation rather than disappearing because the account used for the contribution was emptied.

A 24% marginal-rate planning assumption would estimate $1,260 federal tax on that $5,250 taxable conversion. It does not mean the pro-rata percentage is 24%, and it is not a calculation of the entire return. A progressive estimate can differ if the conversion crosses a bracket. Repeating a conversion later in the same calendar year does not create a fresh independent ratio for a different IRA. Gather the year's totals before preparing the actual annual form.

Example B: $7,000 converted with $21,000 remaining

Example B: $7,000 converted with $21,000 remaining
Form 8606 line	Modeled amount
1	$0.00
2	$7,000.00
3	$7,000.00
4	$0.00
5	$7,000.00
6	$21,000.00
7	$0.00
8	$7,000.00
9	$28,000.00
10	0.250000
11	$1,750.00
12	$0.00
13	$1,750.00
14	$5,250.00
16	$7,000.00
17	$1,750.00
18	$5,250.00
15a	$0.00
15b	$0.00
15c	$0.00

Example C: the contribution earns money before conversion

Assume a $7,000 eligible nondeductible 2025 contribution earns $45 before the entire $7,045 balance is converted. No applicable IRA assets remain at year end and there are no other adjustments. Available basis is still $7,000. The denominator is $7,045 and the ratio is approximately 0.993612. The conversion recovers all $7,000 basis, leaving $45 taxable. The gain did not become contribution basis merely because it arose inside the same IRA, and converting more than the regular contribution limit does not itself make the conversion an excess contribution.

For comparison, if value fell before conversion, unused basis could remain rather than creating an immediate deductible loss. Currency rounding and the official whole-dollar filing convention can also differ from a planning display that keeps cents. The site separates the high-precision model from its whole-dollar worksheet. Use the calculator to change one input at a time, then explain why the denominator changed. That process is more useful than memorizing a shortcut that applies only when there are no other transactions.

Example C: $45 earned before conversion

Example C: $45 earned before conversion
Form 8606 line	Modeled amount
1	$7,000.00
2	$0.00
3	$7,000.00
4	$0.00
5	$7,000.00
6	$0.00
7	$0.00
8	$7,045.00
9	$7,045.00
10	0.993612
11	$7,000.00
12	$0.00
13	$7,000.00
14	$0.00
16	$7,045.00
17	$7,000.00
18	$45.00
15a	$0.00
15b	$0.00
15c	$0.00

Use the formula within its actual scope

No-distribution years have an official branch from line 3 to line 14. A full conversion with only prior basis and no current contribution or other relevant distribution can use Part II directly, because the Part I heading does not require Part I solely for that full conversion. The modeled taxable amount can be identical even when the filing path differs. The methodology and Form 8606 guide distinguish a teaching allocation table from the lines that belong on a filed return.

Stop and obtain case-specific review for disaster repayments, qualified charitable distributions, HSA funding distributions, inherited accounts, special basis adjustments and Roth withdrawal ordering. A reverse rollover also uses a special taxable-only rule rather than the ordinary conversion allocation alone. Keep the year-end statements and all custodian forms with the calculation. The formula answers how basis is allocated under stated assumptions; it does not establish contribution eligibility, plan acceptance, investment suitability or permission to withdraw Roth earnings tax free.

About the publisher: Moss Ladder

Moss Ladder owns and publishes RothProRata.com, an independent educational website about IRA basis, Roth conversions and Form 8606. The guides connect official sources with invented examples, document checklists and browser-local planning tools.

AI-assisted tools help prepare explanations and software. Numerical allocation examples state their assumptions and are checked with automated calculations. These engineering checks do not constitute independent CPA or Enrolled Agent review, and no professional tax credential is claimed.

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Official sources

Source year and transaction type matter. Citations support the explanation; they do not imply government endorsement.