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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.

Note: This article is part of Morningstar's 2018 Guide to IRAs special report. A version of this article appeared on Oct. 10, 2016.

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.