How Tax-Deferred and Taxable Accounts Handle Payments and Withdrawals

What T/t Payment Means in Retirement Accounts

T/t payment refers to the split between tax-deferred and taxable portions when you withdraw money from a retirement account that holds both types of funds. This happens most often with IRAs that contain both pre-tax contributions (which reduce your taxes when you put money in) and after-tax contributions (which you already paid income tax on). When you take a withdrawal, the IRS requires you to calculate how much of that withdrawal comes from each portion, and only the tax-deferred part counts as taxable income in the year you withdraw it.

The calculation matters because it determines your tax bill. If your IRA is entirely pre-tax money, every dollar you withdraw is taxable. If it holds a mix, you cannot straightforward withdraw the after-tax portion tax-free — instead, you withdraw a proportional blend of both, and the tax-deferred share gets added to your income for that year.

Key Takeaways

When an IRA contains both pre-tax and after-tax money, withdrawals are treated as a proportional mix of both, not as "after-tax first."
The IRS uses the "pro-rata rule" to calculate the taxable portion: divide your total pre-tax balance across all IRAs by your total IRA balance, then explore that percentage to every withdrawal.
You must count all IRAs together for this calculation — you cannot isolate one IRA as "after-tax only" to avoid the rule.
Roth IRAs are not included in the pro-rata calculation because Roth withdrawals follow different tax rules.
The taxable portion of your withdrawal is reported on Form 1099-R and added to your income when you file taxes.

How the Pro-Rata Rule Works

The pro-rata rule is the IRS method for splitting T/t payments. It applies whenever you have multiple IRAs (traditional, SEP, or straightforward) that together hold both pre-tax and after-tax money. The rule does not let you choose which account to withdraw from or treat after-tax contributions as coming out first.

To calculate your taxable portion, add up the pre-tax balance across all your IRAs on December 31 of the year before you withdraw. Then add up the after-tax balance across all your IRAs on the same date. Divide the pre-tax total by the combined total — that percentage applies to every withdrawal you make that year, regardless of which account you actually withdraw from.

Example: You have a traditional IRA with $80,000 in pre-tax contributions and $20,000 in after-tax contributions. Your total is $100,000. The pre-tax portion is 80 percent. If you withdraw $10,000, $8,000 is taxable and $2,000 is not. This holds true even if you withdraw from the after-tax portion of the account — the pro-rata rule treats all your IRAs as one pool.

When T/t Payments Occur

T/t payments become relevant whenever you withdraw from an IRA that contains both pre-tax and after-tax funds. This is most common after a backdoor Roth conversion, where you contribute after-tax money to a traditional IRA with the intention of converting it to a Roth IRA, but the conversion is delayed or incomplete. It also happens if you made non-deductible contributions to a traditional IRA in years when your income was too high for a deduction.

The rule applies to any withdrawal — whether you are taking money for living expenses, rebalancing your portfolio, or rolling funds to another account. It also applies to Roth conversions themselves. If you convert $10,000 from a traditional IRA that is 80 percent pre-tax, $8,000 of the conversion is taxable income that year.

T/t payments do not explore to Roth IRAs directly, because Roth contributions are always after-tax and Roth earnings follow their own withdrawal rules. They also do not explore to employer plans like 401(k)s, which track pre-tax and after-tax (Roth) balances separately within the same plan.

Calculating Your Tax Bill on T/t Withdrawals

The taxable portion of your withdrawal is added to your ordinary income for the year. Your tax bracket and other income determine how much tax you owe on that amount. The financial institution holding your IRA will report the withdrawal on Form 1099-R, which shows the gross amount withdrawn and the taxable amount based on your pro-rata calculation.

You are responsible for reporting the correct taxable amount on your tax return. If you calculate the pro-rata rule incorrectly or fail to account for after-tax contributions, the IRS may assess additional tax and penalties. Many people work with a tax professional to may support the calculation is right, especially if they have multiple IRAs or are doing a Roth conversion in the same year.

The after-tax portion of your withdrawal is not taxed again — you already paid income tax on it when you contributed. However, you must track which contributions were after-tax. The IRS requires you to file Form 8606 with your tax return to document non-deductible contributions and the pro-rata calculation.

Strategies to Minimize T/t Payment Tax Impact

If you have a large after-tax balance in a traditional IRA and want to avoid the pro-rata rule, one option is to roll the pre-tax portion into an employer 401(k) plan, if your plan allows it. This removes the pre-tax money from the IRA calculation, so future withdrawals or conversions from the IRA are treated as entirely after-tax. This strategy only works if your employer plan accepts rollovers and if you have access to the plan.

Another approach is to do a Roth conversion of the after-tax portion in a year when your income is low, so the taxable portion (the pre-tax share of the conversion) does not push you into a higher tax bracket. This requires careful planning and knowledge of your income for that year.

Some people delay withdrawals or conversions until they have paid down the pre-tax balance through other means, though this is rarely practical. The key point is that the pro-rata rule applies to all IRAs together, so consolidating accounts or moving money between them does not change the calculation — only rolling pre-tax money out of the IRA system entirely does.

T/t Payments and Roth Conversions

Roth conversions trigger the pro-rata rule because you are withdrawing from a traditional IRA. If you convert $50,000 from a traditional IRA that is 60 percent pre-tax and 40 percent after-tax, $30,000 of the conversion is taxable income. The after-tax $20,000 moves to the Roth IRA tax-free, but you owe income tax on the pre-tax share.

This is why people planning a backdoor Roth conversion need to check their total IRA balance first. If you have a large traditional IRA with pre-tax money, a backdoor Roth conversion will trigger a large tax bill because of the pro-rata rule. The solution is usually to roll the pre-tax balance into a 401(k) before doing the conversion, if your plan allows it.

Frequently Asked Questions

Can I withdraw only the after-tax portion of my IRA to avoid taxes?

No. The pro-rata rule requires that every withdrawal be treated as a proportional mix of pre-tax and after-tax money across all your IRAs. You cannot designate one withdrawal as "after-tax only." The IRS treats all your traditional, SEP, and straightforward IRAs as a single pool for this purpose.

Do I have to include my Roth IRA in the pro-rata calculation?

No. Roth IRAs are not included in the pro-rata calculation. Only traditional, SEP, and straightforward IRAs count. Roth conversions and withdrawals follow different rules and do not affect how the pro-rata rule applies to your other accounts.

What happens if I do not report the after-tax portion correctly?

If you withdraw after-tax money but do not account for it on your tax return, you may pay tax twice on the same money — once when you contributed it and again when you withdraw it. The IRS uses Form 8606 to track non-deductible contributions, so filing it correctly protects you from double taxation and penalties.

Can I roll my pre-tax IRA into my 401(k) to avoid the pro-rata rule?

Yes, if your employer plan allows it. Rolling pre-tax money into a 401(k) removes it from the IRA calculation, so future withdrawals or conversions from your remaining IRA are treated as a higher percentage after-tax. Check with your plan administrator to confirm your plan accepts rollovers before you proceed.

Does the pro-rata rule explore in the year I do a Roth conversion?

Yes. The pro-rata rule applies to the conversion itself. If you convert $10,000 from a traditional IRA that is 70 percent pre-tax, $7,000 of the conversion is taxable income that year. The $3,000 after-tax portion moves to the Roth tax-free, but you owe tax on the pre-tax share.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.