I’m converting to Roth with some non-deductible contributions in 2025. Pro-rata rule should I use 12/31/24 balances or 12/31/25 ?

[dmertz · Accepted solution]

A Roth conversion performed in 2025 will be reportable on your 2025 tax return that you prepare next year and your 12/31/2025 balance in traditional IRAs will need to be used on the 2025 Form 8606.

[mlondergan]

Thanks but the amount in my traditional IRA’s will be lower by the amount I move to Roth this month. Is that right?

[dmertz]

Correct.  Form 8606 sums the year-end balance with the distributions/conversions (other than QCDs, HFDs and distributions those rolled over to a traditional IRA) when figuring the taxable amount of distributions/conversions.

[mlondergan]

OK thanks.  So if I'm converting in 2025 I think I should use the 12/31/24 balances to determine percentage that is taxable.  If all of my IRA's are valued at $200K as of 12/31/24 and I have made $60K in non-deductible contributions over the years then 70% of any Roth conversions in 2025 will be taxable?  Some folks have said that I would use the 12/31/25 balances to determine the taxable portion, but that just doesn't seem correct.

[dmertz]

Your 2025 Form 8606 used to calculate the taxable amounts of distributions and Roth conversion performed in 2025 is required to used your 12/31/2025 balances of your traditional IRAs.  Your 12/31/2024 balance is used nowhere in this calculation.

You might take into account your 2024 year-end balance when making a guess at what your 2025 year-end balance will be so that you can estimate the nontaxable and taxable amounts of traditional IRA distributions and conversions made in 2025, but it will be your actual 2025 year-end balance that is used in the calculation on your 2025 Form 8606.  The nontaxable and taxable amounts will be determined as if the transactions all occurred on 12/31/2025.

Regarding your example, if you have $60,000 in nondeductible traditional IRA contributions, you convert $100,000 of a $200,000 traditional IRA balance on March 31, 2025, and then the investments in your traditional IRAs increase in value by $50,000 by, say, by rolling $50,000 over to your traditional IRAs from a 401(k) such that the balance in your traditional IRAs on December 31, 2025 is $150,000, the nontaxable amount of your $100,000 Roth conversion will be calculated as:

$100,000 * $60,000 / ($100,000 + $150,000) = $24,000

Notice that your 2024 year-end balance of $20,000 is used nowhere in the calculation.  Your 2025 year-end balance of $150,000 is used.