Definition
The IRS rule that treats all of your traditional, SEP, and SIMPLE IRAs as a single pot when you convert any of it to a Roth. The taxable share of a conversion equals the pre-tax share of that combined balance, so you cannot choose to convert only the after-tax dollars. Roth IRAs and workplace plans such as a 401(k) are not counted.
Why it matters
This is the trap that turns a clean backdoor Roth into a mostly taxable conversion for anyone with an old rollover IRA sitting around. Because the calculation uses balances as of December 31, the usual fix, moving pre-tax IRA money into a workplace plan, has to happen before year end.
Example
An investor makes a $6,000 non-deductible contribution to a traditional IRA while also holding a $54,000 rollover IRA from a former job. Her IRAs total $60,000, of which only 10% is after-tax, so converting $6,000 makes $5,400 taxable and just $600 tax-free. Rolling the $54,000 into her current 401(k) first would leave the $6,000 as her only IRA money and the whole conversion tax-free.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.