Pro Rata Rule - does Money Market vs Invested Matter for Retirement Accounts?

Hey tax gurus, I'm trying to understand the pro rata rule for my retirement accounts and I'm getting seriously confused about how money market funds vs actually invested money affects things. So I have both a traditional IRA with about $28,000 and a Roth IRA. I want to do a backdoor Roth conversion since I'm over the income limit for direct contributions this year. The thing is, about $18,000 of my traditional IRA is in money market funds (just sitting there earning that interest) and the rest is invested in various mutual funds. When it comes to calculating the pro rata rule for tax purposes, does the IRS care whether my pre-tax money is in a money market fund vs actually invested? Or is it all just considered "traditional IRA money" regardless of what it's doing within the account? I heard from a friend that as long as the money is in a money market fund and not invested, it doesn't count toward the pro rata calculation, but that sounds too good to be true. Anyone know the real answer here? Really trying to avoid a surprise tax bill next year!

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18 comments

Zainab Omar

•8M

The pro rata rule doesn't care where your IRA money is held within the account. The IRS looks at ALL your traditional IRA balances as of December 31st of the year you do the conversion, regardless of whether the money is in a money market fund, invested in stocks/bonds, or just sitting in cash. Your friend is unfortunately giving you incorrect information. For pro rata calculations, the IRS considers the total balance across all your traditional IRAs, SEP IRAs, and SIMPLE IRAs. The investment vehicle within those accounts (money market, stocks, bonds, etc.) makes absolutely no difference. So if you have $28,000 in your traditional IRA and attempt a backdoor Roth with a $6,000 non-deductible contribution, roughly 82% of your conversion would be taxable. The formula is: (taxable IRA money / total IRA money) × conversion amount.

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Zainab Omar

•8M

You're exactly right about emptying the traditional IRA - that's one of the main strategies to avoid the pro rata rule. Many people who have access to employer 401(k) plans will roll their traditional IRA funds into their 401(k) first, which removes them from the pro rata calculation. Regarding timing, the IRS looks at your IRA balances as of December 31st of the year you do the conversion. So technically, if you did a conversion in January 2025 and then moved all your traditional IRA funds to a 401(k) before December 31, 2025, you'd still be subject to pro rata. Conversely, if you cleared out your traditional IRA in December 2024 and did the conversion in January 2025, you could avoid pro rata.

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Yara Sayegh

•8M

Had this EXACT same issue last year! I was so confused about the pro rata rules with my IRAs that I ended up using https://taxr.ai to analyze my statements and break down exactly how much of my conversion would be taxable. Saved me from making a costly mistake. The tool lets you upload your IRA statements and tax docs, then explains exactly how the pro rata rule applies in your specific situation. It showed me that I needed to roll my Traditional IRA funds into my employer 401k first (which thankfully allowed it) before doing my backdoor Roth conversion. What was super helpful was that it calculated the exact tax impact based on my statements rather than me trying to figure out the math myself. Definitely worth checking out if you're dealing with retirement account conversions.

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Yara Sayegh

•8M

It absolutely works with complicated situations. The system is designed to handle multiple account types including traditional IRAs, SEPs, SIMPLEs, and 401ks. It actually helps identify which accounts are eligible for rollovers to minimize pro rata tax impacts. Regarding the December 31st valuation and Form 8606 tracking - that's actually one of its strongest features. It looks at your previous tax returns to find any non-deductible contributions you've already made and tracks your basis across multiple years. It also clearly explains how the December 31st balance affects your specific situation and helps you plan the timing of your conversions for maximum tax efficiency.

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Keisha Johnson

•8M

Just wanted to follow up about my experience with taxr.ai after I was asking about my complicated retirement accounts. I went ahead and tried it with my mess of accounts (2 traditional IRAs, a SEP-IRA, and 3 old 401ks), and it actually sorted everything out perfectly! The system identified that my best option was to roll my SEP-IRA and one of my traditional IRAs into my current employer's 401k plan, which I didn't even realize was possible. This reduced my pro rata calculation significantly. It also flagged that I had non-deductible contributions from 2017 that I hadn't been tracking properly on Form 8606, which would have been a nightmare to sort out later. Honestly, the clarity it provided about my specific situation was worth every penny. No more confusion about pro rata rules!

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CosmicCowboy

•8M

If you're trying to reach the IRS to get clarification on pro rata rules (which I tried for WEEKS), use https://claimyr.com to get through to an actual human. I wasted hours on hold trying to verify how rollovers would affect my pro rata calculations until I found this service. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was honestly about to give up on doing a backdoor Roth altogether because I couldn't get clear answers. Claimyr got me through to an IRS representative in about 20 minutes instead of the 2+ hour wait times I was experiencing. The agent walked me through exactly how to handle my specific situation with my traditional IRA balances and previous non-deductible contributions.

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CosmicCowboy

•8M

It's not magic - they use an automated system that navigates the IRS phone tree and waits on hold for you. When they reach a human, you get a call back. It worked so well because you don't have to physically stay on the line yourself during that 2-3 hour wait time. The service is actually used by tax professionals too, which is how I found out about it. It's not about "skipping the line" - you still wait your turn, but their system does the waiting instead of you having to sit there with your phone to your ear for hours. It saved me literally hours of time, and the IRS agent I eventually spoke with gave me the exact guidance I needed about handling my pro rata calculations.

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Paolo Longo

•8M

I need to eat my words about Claimyr. After posting that skeptical comment, I decided to try it anyway because I was desperate to talk to someone at the IRS about my backdoor Roth situation and the pro rata rule calculations. To my complete surprise, it actually worked! I got a callback within 35 minutes (way better than the 3+ hours I spent on my previous attempt). The IRS representative confirmed that I could indeed roll my traditional IRA into my employer's 401k to avoid the pro rata rule entirely, and also explained how to properly document my non-deductible contributions from previous years. I've been filing taxes for 20+ years and have never been able to get through to the IRS this easily. Definitely using this again next time I have tax questions that need official answers.

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Oliver Schulz

•8M

Yes, this absolutely works with side gig self-employment! I was in exactly your situation - full-time W-2 job but also doing photography on the side with 1099 income. You can open a solo 401k with your self-employment income even if it's not your main job. There's no minimum income requirement to open a solo 401k, though you can only contribute based on your actual self-employment earnings. But for rollover purposes, you can roll in much larger amounts from your traditional IRAs regardless of how much you earn from your side gig. Just make sure you set up the solo 401k before the end of the calendar year.

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