The IRA Aggregation Rule

There are a lot of retirement rules people misunderstand — but the IRA Aggregation Rule is in a category of its own. It's the Taylor Swift of IRS rules: always in the spotlight, always misunderstood, and somehow still managing to surprise people after all these years.

So let's break this down for regular folks.

---

What the Aggregation Rule Actually Means (in one sentence)

When the IRS looks at your Traditional IRAs, it sees one giant bucket, no matter how many separate accounts you have.

You may think you have:

• "My rollover IRA over here,"

• "My contributory IRA over there,"

• "My backdoor Roth staging account hiding in the corner,"

…but the IRS sees one big pot of money.

That's the whole rule.
Everything else is just the math behind that rule.

---

Why This Rule Exists (a tiny bit of IRS logic)

People used to try the "account shell game":

"I'll put all my deductible contributions in this one, all my nondeductible contributions in that one, then magically only convert the nondeductible one to a Roth tax-free."

The IRS noticed.

They said, in essence:

"That's cute. No."

Thus, the aggregation rule was born.

---

Where the Rule Shows Up in Real Life

The Aggregation Rule matters in three big situations:

1. Roth Conversions (the big one)

If you convert ANY amount to a Roth, the IRS checks:

• all your Traditional IRAs

• all your SEP IRAs

• all your SIMPLE IRAs

They combine everything to figure out what percentage of the conversion is taxable.

There is no "I'll convert only the nondeductible account."
In IRS-land, that account does not exist as a separate thing.

2. Required Minimum Distributions (RMDs)

Your RMD is calculated separately for each IRA…
But the IRS allows you to satisfy the total RMD from any one of them.

Why?
No one really knows. Probably because someone at the IRS had coffee that morning.

3. Early withdrawals with a nondeductible basis

If you take money out before 59½, the aggregation rule also determines how much of the withdrawal is:

• taxable

• not taxable

• subject to penalty

• or all three (the IRS likes to multitask)

---

Where People Get This Wrong (and why it costs them)

Here are the four greatest hits:

Mistake #1: "I'll put nondeductible contributions in one IRA so I can convert them tax-free later."

Nope.

There is no such thing as a "clean" nondeductible IRA in the eyes of the IRS.
Every dollar of basis gets blended with everything else.

Mistake #2: Thinking Rollover IRAs are special

Rollover IRAs are only special in that they often come from a 401(k).
Once they're in the IRA world, the IRS treats them exactly the same as your regular Traditional IRA.

Mistake #3: Forgetting that SEP and SIMPLE IRAs get lumped in too

Yeah… they count.

SEP IRA? Aggregated.
SIMPLE IRA? Aggregated.
Everything but Roth IRAs gets thrown into the same stew.

Mistake #4: Misunderstanding Form 8606

This form tracks your nondeductible basis.

If you don't file it, the IRS assumes your entire IRA is deductible — forever.
This is the only time you'll ever see the IRS assume something not in your favor.

Also, stay tuned, we will be talking about Form 8606 next week.

---

Okay, But How Does the IRS Actually Do the Math?

Here's the simple version:

• Add up the value of all your Traditional, SEP, and SIMPLE IRAs.

• Add your nondeductible basis.

• Divide basis by total IRA balance.

• That percentage is the tax-free part of:
• withdrawals
• conversions
• distributions

The rest is taxable.

---

Quick Example

Let's say you have:

• $100,000 in a Traditional IRA

• $50,000 in a Rollover IRA

• $0 in your SEP/SIMPLE

• $10,000 of nondeductible basis

Your total IRA balance = $150,000 Your basis = $10,000

10,000 ÷ 150,000 = 6.67%

That means:

• 6.67% of any conversion or withdrawal is tax-free

• 93.33% is taxable

If you convert $20,000 to a Roth, you do NOT get to choose which IRA it "comes from."

The IRS says:

• $1,334 = tax-free

• $18,666 = taxable

There is no "I took it from the nondeductible bucket." There are no buckets. There is only one giant stew.

---

Why This Rule Is So Important

Because without it, people would shop for accounts like they shop for clearance rack jeans:

• "This one's for deductible contributions."

• "This one's nondeductible."

• "This one is my future conversion stash."

The IRS ended that game.

Now your entire Traditional IRA world is treated as one unified organism.

---

What You Need to Know

• All Traditional, SEP, and SIMPLE IRAs are aggregated.

• Rollover IRAs are not special for aggregation.

• Pro-rata applies to conversions and withdrawals.

• A clean nondeductible IRA does not exist in IRS math.

• Form 8606 matters for tracking basis.

• RMDs can be satisfied from any IRA, even though they're calculated separately.

---

What Clients Need to Know (plain English)

• "All your IRAs get mixed together for IRS calculations."

• "There's no way to isolate nondeductible contributions for a tax-free conversion later."

• "Conversions and withdrawals follow a blended formula."

• "Keeping track of basis is important."

• "IRAs don't work like separate accounts. The IRS sees one combined balance."

---

Final Thought

If you take nothing else from this Knowledge Blast, take this:

Your IRA accounts may live in different places, but in IRS world they all sleep in the same room.

Aggregation isn't complicated — it's just wildly counterintuitive.

And now you understand it better than 90% of the internet.

I write one of these every day, one retirement rule, explained in plain language and verified against the source. The daily email is free: subscribe here.