What is the pro-rata rule and why does it matter for Roth conversions?

The pro-rata rule says the IRS treats all your Traditional, SEP, and SIMPLE IRAs as one combined pot when you convert any of it to Roth. You can't cherry-pick only your after-tax dollars. If 90% of your total IRA balance is pre-tax and 10% is after-tax (nondeductible) basis, then 90% of any conversion is taxable. This is why a backdoor Roth can backfire: if you have a large rollover IRA from an old 401(k), converting a fresh $7,000 nondeductible contribution triggers tax on most of it. The common fix is to roll pre-tax IRA money into your current employer's 401(k) before December 31, leaving only after-tax basis behind so the conversion stays nearly tax-free. Form 8606 calculates your taxable portion each year.