A $7,000 non-deductible contribution converted the same year is entirely tax-free — if it is the only traditional IRA money you have. The rule that decides it, §408(d)(2), treats every traditional, SEP and SIMPLE IRA as one account, so the conversion is tax-free only in proportion to the basis behind it.
With $10,000 sitting in an old rollover, 58.8% of that contribution is taxable. With $500,000, it is 98.6% — the step advertised as free costs $1,657 at a 24% rate.
Pre-tax balance is everything in traditional, SEP and SIMPLE IRAs on 31 December. Employer plans are not counted.
| Existing pre-tax IRA | Converts tax-free | Taxable | Tax at 22% | at 24% | at 32% |
|---|---|---|---|---|---|
| $0 | $7,000.00 | $0.00 (0.0%) | $0.00 | $0.00 | $0.00 |
| $10,000 | $2,882.35 | $4,117.65 (58.8%) | $905.88 | $988.24 | $1,317.65 |
| $25,000 | $1,531.25 | $5,468.75 (78.1%) | $1,203.12 | $1,312.50 | $1,750.00 |
| $50,000 | $859.65 | $6,140.35 (87.7%) | $1,350.88 | $1,473.68 | $1,964.91 |
| $100,000 | $457.94 | $6,542.06 (93.5%) | $1,439.25 | $1,570.09 | $2,093.46 |
| $250,000 | $190.66 | $6,809.34 (97.3%) | $1,498.05 | $1,634.24 | $2,178.99 |
| $500,000 | $96.65 | $6,903.35 (98.6%) | $1,518.74 | $1,656.80 | $2,209.07 |
| $1,000,000 | $48.66 | $6,951.34 (99.3%) | $1,529.29 | $1,668.32 | $2,224.43 |
The shape is the point: the cost does not creep in as the rollover grows, it arrives almost immediately. $10,000 — one modest old 401(k) — already takes 58.8% of it. Past that the curve flattens, because there is little left to lose.
The taxable slice is ordinary income in the year you convert, so it stacks on everything else that year — and it can push capital gains out of the 0% bracket or lift the income Medicare prices two years later. The planner runs it against your own year rather than a rate in a table.
A $7,000 non-deductible contribution converted in the same year, with the stated balance already sitting in traditional, SEP or SIMPLE IRAs. §408(d)(2) treats them all as one account, so the conversion is tax-free only in proportion to the basis behind it.
Employer plan balances (401(k), 403(b)) are not counted in the pro-rata fraction; only IRAs are. The figures assume the contribution and conversion happen in the same tax year and that no other distribution is taken.
Rule: IRC §408(d)(1)-(2), reported on Form 8606 Part I. Computed by the same engine the planner runs, and asserted against it by a test.
This is a projection under stated assumptions — not financial or tax advice. Whether a rollover can be moved into an employer plan to clear the way is a question for whoever handles your return.