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. §408(d)(2) treats every traditional IRA as one account, so the conversion recovers basis in proportion to the whole balance — not the part she just put in. The basis is not lost, only diluted — and the rule pools IRAs, not 401(k)s, so the last scenario prices the standard escape: 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 here was left blank. These follow from the figures above, under the assumptions this example states.
- $7,000 was converted — no more than the after-tax basis stated — and only $92 came out free; the other $6,908 was taxable, because every traditional IRA counts as one account.
The planner arrives with this household already filled in. Change anything — the balances, the ages, the assumptions — and run it as yourself.
A projection under stated assumptions, not financial or tax advice.