Confused about pro-rata tax on backdoor Roth conversion - getting mixed advice!

The confusion is understandable! The pro-rata rule is one of the most misunderstood aspects of retirement account planning. Here's the simple explanation: When you do a Roth conversion, the IRS doesn't let you cherry-pick which dollars you want to convert. They look at ALL your IRA accounts together (including SEP and SIMPLE IRAs if you have them). The pro-rata rule treats all your traditional IRA money as one pool. So even though you specifically told your brokerage to only convert the after-tax $7,000, the IRS doesn't see it that way. They calculate what percentage of your total IRA balance is after-tax money. In your case, with $7,000 after-tax in a roughly $1.3 million total IRA balance, only about 0.5% of your conversion would be tax-free. Your financial advisor is correct about the pro-rata taxation applying. Your tax specialist might be thinking of a situation where you have no pre-tax IRA funds, which isn't your case.

I went through something similar last year and found https://taxr.ai incredibly helpful. I was getting conflicting advice about backdoor Roth conversions and pro-rata rules from my CPA and financial planner too. What helped was uploading my previous Form 8606s and tax returns to taxr.ai, which analyzed everything and showed me exactly how the pro-rata rule would affect my specific situation. It also flagged that I had been incorrectly reporting my conversions for 2 years! The system showed me precisely which lines on Form 8606 were incorrect and how to fix them. The calculator there helped me understand that with a large traditional IRA balance like yours, the backdoor Roth might not make sense without first considering a reverse rollover of your pre-tax IRA funds back to a 401(k) if you have access to one.

I wanted to follow up about my experience with taxr.ai after asking about it. I tried it with my complicated retirement account situation (multiple IRAs and old 403(b) accounts), and I'm actually shocked at how helpful it was. The system immediately identified that I'd been making a huge mistake with my backdoor Roth conversions for years. Because I had forgotten about a small SEP IRA from freelance work years ago, almost all of my "tax-free" conversions should have actually been mostly taxable under the pro-rata rule! It gave me a detailed report showing exactly how much tax I should have paid each year and generated corrected Forms 8606 I could use for amendments. Seriously saved me from what could have been a nightmare audit situation. The visualization of how the pro-rata rule works with all my accounts together finally made it click for me.

I had a similar issue last year trying to figure out pro-rata rules. After two months of calling the IRS and never getting through, I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They got me connected to an actual IRS agent in about 15 minutes! The IRS agent explained that the pro-rata rule looks at all your IRAs together (traditional, SEP, SIMPLE) as one big pot as of December 31 of the year you do the conversion. It doesn't matter which specific dollars you try to convert. What matters is the ratio of after-tax to pre-tax money across ALL your IRAs. With your $1.3 million in pre-tax money and only $7,000 in after-tax contributions, almost all of your conversion would be taxable. The agent also told me about a potential workaround - if you have an active 401(k) at work, you might be able to roll your pre-tax IRA funds into it, then do a clean backdoor Roth.

I need to update my skeptical comment about Claimyr. I was desperate enough to try it after waiting on hold with the IRS for 3+ hours three different days. Honestly, I was shocked when I got connected to an IRS agent in about 20 minutes. The agent confirmed exactly what people are saying here about the pro-rata rule - it applies across all your IRAs as one big pool. No cherry-picking allowed. The agent walked me through Form 8606 line by line and showed me how to calculate the taxable portion of a Roth conversion with mixed funds. Most importantly, she told me about the "cream in the coffee" analogy they use internally - once you mix pre-tax and after-tax money in IRAs, you can't unmix them for conversion purposes. The only way around it is what someone mentioned above - rolling pre-tax IRA funds into an employer plan first if possible. I'm still amazed I got through to a real human at the IRS who could actually explain this clearly!

Everyone's missing a critical point! Check if your 401k plan allows for incoming rollovers from IRAs. If it does, you might be able to roll your $1.3 million from the traditional IRA into your 401k (if you have one). Then you'd have $0 in your traditional IRA, contribute the $7k non-deductible amount, and convert it to Roth tax-free! This strategy eliminates the pro-rata issue completely because the calculation only looks at IRA balances, not 401k balances. I did this exact move last year after learning about it.

Important point: You MUST file Form 8606 to report non-deductible contributions to traditional IRAs regardless of whether you convert them! This documents your basis so you don't get taxed twice. I learned this the hard way. If you've been doing backdoor Roth conversions without filing 8606s properly, you might want to amend those returns before a potential audit. The IRS has been paying more attention to Roth conversion strategies lately.

This is exactly why I always recommend getting a second (or third) opinion on complex tax situations! Your financial advisor is correct about the pro-rata rule applying. The IRS doesn't care which specific dollars you tell your brokerage to convert - they look at ALL your IRA balances together as one big pool. Here's what's happening: With $1.3 million in pre-tax IRA funds and only $7,000 in after-tax contributions, roughly 99.5% of any conversion will be taxable. The pro-rata calculation is: (Total after-tax basis ÷ Total IRA balance) × Conversion amount = Tax-free portion. Your tax specialist might be confused about the rules or thinking of a different scenario. I'd strongly suggest getting clarification from them about why they think it's not taxable. Also, definitely look into the reverse rollover strategy others mentioned - if your employer 401(k) accepts incoming rollovers, you could move that $1.3M there first, then do clean backdoor Roth conversions going forward. This is often the best solution for high earners in your situation.