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Investing Specialists

Don't Let Pro Rata Rules Trip Up Your Retirement Plan

Failing to understand these rules can force investors to pay more in taxes than they expected to.

At first blush, the term "pro rata" sounds like the worst type of inscrutable legalese. But it's an important concept for investors, especially for those considering IRA conversions or mulling their distribution options from their retirement plans. Gaining a working knowledge of the "pro rata" rules and the various ways in which they affect you can help you avoid costly errors while maximizing your take-home returns.

Two Key Applications for Pro Rata Rules
Pro rata is a Latin term that means "in proportion." To use a simple example of pro rata in action, if I go out with a friend and she orders three drinks and I have just one, and our total bill is $40, her pro rata share of the bill would be $30 and mine would be $10. (That assumes, of course, that the drinks were roughly equal in price, and we don't want anyone to go home mad.)

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