By Dr. James M. Dahle, WCI Founder
I know a lot of people have trouble wrapping their minds around investing, retirement accounts, and the tax code, but I was appalled to see a pair of tweets recently. It wasn't that the idea behind the tweets was unusual (although obviously wrong), it was that they were made by a Certified Financial Planner (CFP) with an MBA who describes himself as a “wealth manager” and per his ADV2 has 250 clients and $80M under management. The tweets were in response to another advisor who was (correctly) surprised to learn how many investors had started a taxable account before even maxing out their retirement accounts. Here are the tweets:
I blanked out the advisors' names because I wanted to focus my post today on the arguments, not the people. But if you find yourself getting advice from an advisor making this argument, you should probably fire them. Let's list all the things that are wrong in just two short tweets:
- “Pay less taxes over your lifetime”—Not even close to true and easily debunked.
- “Have more flexibility”—True in some ways, but not worth it. Real flexibility comes from having much more money.
- “Have an asset to leverage for other wealth building”—Somewhat true but misleading.
- “The RMD trap”—Dramatically overblown, but even if you have an “RMD problem”, preferentially using a taxable account isn't the right move.
- “Forced to retire later”—Nobody is ever forced to retire later. They usually make that choice themselves.
I am appalled that I need to write a post defending retirement accounts. The advantages here are so obvious to me that I would expect these sorts of arguments to be made by a beginning investor, not someone who is managing $80M for 250 people. I'm actually feeling really badly for those 250 people right now because I suspect that at least some of the advice they have been given over the years is bad advice. At any rate, let's dissect each of these arguments for a few minutes.
#1 Retirement Accounts Allow You to Pay Less in Taxes
The first argument here is the weakest and the only possible conclusion I can draw here is that the advisor mistakenly compared apples to oranges. If you compare apples to apples, this isn't even close. If you preferentially invest in retirement accounts, you will pay less in taxes over your lifetime and have more money to spend, give, or leave to heirs. How much less? Well, take a look at James Lange's chart from his book Retire Secure (which comes from very reasonable assumptions):
The bottom line is that if you use a retirement account, your money grows faster in the accumulation stage and lasts longer in the distribution stage than if you simply invested in a taxable account.
The main reason for this is that in a retirement account, the money is not taxed as it grows. Distributions of dividends, interest, and capital gains are not taxed each year. If you sell something with a gain, that isn't taxed either. Avoiding this “tax drag” allows the money to grow faster. Even a very tax-efficient investment like a total market index fund will grow about 0.3-0.5% per year faster inside a retirement account.
In addition to this effect, for most investors there is an “arbitrage” of tax rates between your peak earnings years and when you pull the money out of the account later. When you put the money into a tax-deferred account, you save taxes at your marginal tax rate. As you pull money out later, you get to use it to fill the brackets. See the chart below to understand how this works:
Saving money at 35% and then paying at 0%, 10%, 12%…heck, even 22%, 24%, and 32%, is a winning combination. You can take A LOT of money out of a retirement account in retirement before you're paying 35% on any of it. In a tax-free (i.e. Roth account), you don't get this arbitrage, but at least you get to avoid the tax drag inherent in a taxable account.
So how could an advisor possibly get this wrong? Well, the only way I can think of is that the advisor mistakenly put the same amount of money into a taxable account as an IRA and then ran out the numbers and concluded that because IRA withdrawals are taxed at ordinary income tax rates instead of the lower qualified dividend/long term capital gains rates that one would pay less tax on the taxable account. But the problem is that $10K in an IRA is not the equivalent of $10K in a taxable account. If you are in the 35% tax bracket, $10K in an IRA is the equivalent of $6,500 in a taxable account.
So let's run the numbers. We'll assume a 0.5% tax drag on the taxable account and we'll assume an average 15% tax rate on withdrawal of the IRA. We'll assume an 8% pre-tax return and a contribution of $10K (pre-tax) per year for 30 years.
IRA
=FV(8%,30,-10000) = $1,132,832.11
Then, although this obviously isn't going to happen, let's just take it all out at once at a 15% tax rate. Note that this simplifying assumption makes the taxable account look better than it otherwise would. As noted in Lange's chart above, in reality, the avoidance of tax drag in the distribution phase has an even larger effect than during the accumulation phase.
$1,132,832.11 * 85% = $962,907.29
Taxable
=FV(7.5%,30,-6500) = $672,096.12
Let's assume a 15% capital gains rate on the gains and again assume you sell it all on the eve of retirement for some bizarre reason, just to keep things equal for comparison sake.
($672,096.12 – ($6500*30)) * 85% +($6500*30) = $600,531.70
As you can see, you end up with over 60% more money by using the retirement account. Even if assumptions are off a bit, this isn't even close. The retirement account is clearly better, all else being equal.
In the minority of situations where this might not be the case (due to reverse arbitrage), the solution is using Roth contributions and conversions, not using a taxable account.
#2 More Money Creates More Flexibility
While it is true that money in a taxable account has more flexibility than an equal amount of money in a retirement account, real flexibility in your life generally comes from having more money. Worst case scenario, you pull the money out of the retirement account and pay taxes and the 10% early withdrawal penalty. As you can see from the example above, you STILL come out ahead using the retirement account. And since that scenario is very unlikely, this is simply a non-issue.
Some people complain that there are assets they can't invest in inside their retirement accounts. Ignoring the fact that most of those investments probably shouldn't be in your portfolio anyway, there are also self-directed IRAs and individual 401(k)s that you can invest in almost anything. Even many standard 401(k)s have brokerage windows that provide immense flexibility in investment choice. But even if you're “stuck” in an employer's 401(k) with unappetizing investments, you likely aren't stuck there long. The average job tenure these days is between 4 and 5 years. If your investing career is 60 years (30 while working and 30 in retirement), being without your favored investment for 5 years doesn't seem like a big deal.
Speaking of flexibility, one place where retirement accounts are more flexible than taxable accounts is when you change investment strategy or need to rebalance. There is no tax cost to doing this in a retirement account, but there is in a taxable account.
#3 Leverage Isn't Worth Skipping a Retirement Account
The third argument was that you can use more leverage outside of retirement accounts. It is true that you can't invest on margin in an IRA or 401(k). You'll need a taxable account to do that. Of course, you probably shouldn't do that, and I hope you don't need to do that to reach your goals. However, it is not true that you cannot use leverage in a retirement account. You certainly can buy a leveraged rental property inside a self-directed IRA, although you would have to pay Unrelated Business Income Tax (UBIT). If you use a self-directed individual 401(k), you don't even have to do that.
Obviously, if you have an investment that is going to make you 30% and you can only buy it in a taxable account, then that sort of return is going to overcome the benefits of a retirement account. But you might be surprised just how much better the investment has to be in order to overcome the tax benefits inherent in a retirement account.
Let's take the numbers from above, just for simplicity's sake. As you'll recall, we assumed 8% pre-tax returns there and ended up with $962K vs $600K. How much higher would the return on the investment in the taxable account have to be in order for you to finish with $962K? Well, it depends on the tax-efficiency of the investment, but let's assume it is pretty tax-efficient and the tax drag is only 0.5% a year. If that were the case, you would need a pre-tax return of 10.8% instead of 8%.
#4 The Solution to an RMD Trap Is Roth Conversions, Not Skipping Retirement Accounts
First, as I've written before, very few people, including high earners like doctors, will have an “RMD Trap.” It's either a scare tactic used by those with something to sell you or a simple display of ignorance.
Second, if you are one of those few, the solution is not to invest preferentially in a taxable account. It is to do Roth contributions and conversions. Roth IRAs not only do not have Required Minimum Distributions (RMDs), but there is no tax cost to pulling money out of the account anyway.
Third, RMD law seems to keep getting more and more lenient. For example, you no longer have to take RMDs before Age 72 and they were completely waived in 2020.
Concerns about RMDs are NOT a reason to avoid using retirement accounts.
#5 Nobody Is Forced to Retire Later
There are probably lots of people who wait until age 59 1/2 to retire so they don't have to worry at all about the 10% penalty on retirement accounts if you withdraw money prior to age 59 1/2. Just like there are lots of people who wait until they are 65 to retire so they can qualify for Medicare. But neither of these are a requirement to retire. In the case of the “Medicare waiters”, the solution is simply to have enough money to be able to afford to buy health care on your own, at least for those years between retirement and 65 (although as any retiree will tell you, the “free” part of Medicare is not going to cover all your health care needs anyway). In the case of the “Age 59 1/2 waiters”, these early retirees often simply don't understand all the exceptions to the age 59 1/2 rule.
First, if the money is in a 401(k) and you separated from the employer, you can often tap it as soon as you are 55.
Second, there are lots of exceptions to the rule that allow you to avoid the penalty—a first house (for you or a family member), disability, death, health expenses, medical insurance/expenses, IRS levy, and higher education expenses.
Third, the biggest exception to the Age 59 1/2 rule is the Substantially Equal Periodic Payments (SEPP) rule. Basically, early retirement is an exception to the Age 59 1/2 rule. Sure, a 55-year-old can only pull out about 2.4% a year without paying the 10% penalty, but that penalty only applies to the amount above 2.4%.
Mostly, however, it simply doesn't make any sense that someone would have enough money in a taxable account to retire early but would not have had more than enough in retirement accounts to have done so, even if they had to pay a bit of a penalty to do so. And the truth of the matter is that most of those FIRE types are saving so much money each year they couldn't stuff it all into retirement accounts anyway and so they end up with a large taxable account they can use first anyway.
People aren't forced to retire later because they used retirement accounts. They are forced to retire later because they didn't save enough money. If anything, the use of a retirement account HELPED them to retire earlier, rather than preventing them from doing so.
Bonus Material
But wait! There's more. I think we've pretty much shown that investing preferentially in a taxable account is a bad idea already. But let's pile on a bit.
Another Dahle getting ready to defend retirement accounts the goal
Asset Protection
In most states, 401(k) and IRA money receive significant asset protection from creditors. Taxable accounts generally receive none at all.
Estate Planning
You can name beneficiaries for retirement accounts, facilitating inexpensive and simple estate planning. Plus, IRAs and Roth IRAs can be stretched for 10 years by your heirs.
Roth Conversions
You can do Roth conversions in relatively low-income years, allowing YOU to choose when you pay the taxes on the money you earned during your life and at what rate you do so. Can't do that once you passed on a retirement account contribution in favor of a taxable one.
Get Your Match
And of course, make sure you get any possible employer match. That's part of your salary. Skipping that to invest in taxable is truly a colossal mistake.
Exceptions to the Rule
Now, there are always exceptions to any rule of thumb. Let's see if we can think of any to this rule.
#1 Awesome Investments
If you have access to an absolutely awesome investment and there is no way to stick it in a retirement account, it could be worth skipping a retirement account contribution in order to buy it. For example, my investments into my partner blogs like Physician on FIRE, Passive Income MD, and The Physician Philosopher have had spectacular rates of return, but it would not have been practical to buy those in my retirement accounts. If you have investments like that available to you, hopefully you, like me, are saving enough that you'd be able to max out your retirement account and still buy this investment, but if you can't, then that's certainly an exception.
#2 Equity Real Estate
Despite the fact that you can put an equity real estate investment into a self-directed IRA (or better yet, a self-directed individual 401(k)), you may not be dramatically better off by doing so. Most of the income is often sheltered by depreciation, you can't use the property yourself, and if you do exchanges well, you may never end up having that depreciation recaptured. Plus it makes leverage easier to use. Again, like the exception above, hopefully, you can max out your retirement accounts AND still make this investment, but if not, perhaps it could be justified.
#3 Money You Know You'll Need Well Before 59 1/2
If there is money you are going to need to spend in your 30s or even 40s, then the SEPP rule becomes pretty unwieldy. Same thing for short term money, like next year's tax bill or a down payment you'll need in a few years. Keep that out of your retirement accounts (and out of long-term investments for that matter). But again, if you'er retiring super early, you probably have 457s or a sizable taxable account and can wait to tap the retirement accounts.
So there you have it. While there are few absolutes, skipping tax-protected/asset-protected contributions in favor of unprotected, taxable account is usually a mistake.
What do you think? Under what circumstances would you or have you skipped a retirement account contribution to invest elsewhere? Comment below!
100% agree with your analysis. But I would add 2 additional points.
1. NIIT Tax. It is likely that for the actively working high income professional, investment earnings outside of a retirement plan will also be subject to the 3.8% NIIT tax since the income threshold Is $200k for individuals and 250k for couples. At retirement 1099R income is exempt from this tax whereas capital gains and dividends are not. 200k may sound like a lot now but this is not currently indexed for inflation.
2. The capital gains rate is lower now but is always a target for tax increases since only the “rich” pay capital gains.
My tax-advantaged retirement accounts still far outweigh my taxable account (though my goal over the next few years is to correct that). However, I’ve often wondered how the FIRE crowd is able to retire in their 40’s or early 50’s if they have a substantial portion of their investment dollars in tax-advantaged accounts? Can you use the SEPP exception rule if you’re say, 48 years old?
Yes- you prorate it for your life expectancy as above in #5. If you know (how?) you’re gonna die at 50 then you might have to pay the 10% penalty to get it all out by then; best in that case to borrow money that your retirement fund would pay off at your death.
It’s not my plan (I’m > 50% in taxable) but if you have 4 to 5 years of expenses outside of retirement accounts, a Roth Conversion ladder can be a clever way to move your tax-deferred 401(k) to an easily accessible Roth IRA.
The steps are 401(k) rollover to IRA followed by annual conversions to Roth IRA. The amount converted is then available to you 5 calendar years later (or as soon as 4 years and a few days if converting late December).
Cheers!
-PoF
Enjoyed this post very much but it brings up a few questions:
1. Looking at the RMD calculations the max distribution period is 27.4 which means for a 1MM account the RMD is only $36K. Doesn’t seem like it would present too much of a problem.
2. I would love to do Roth conversions, but unfortunately, both my spouse and I have numerous IRAs that would require that we pay some ratio on all the amounts and not just the conversions. Can anyone offer articles or ideas on how to make the conversion work in these instances?
Thanks,
Mark
2. Were you expecting the Roth conversion to be free like in a Backdoor Roth IRA? That’s not the way most of them work. You’re prepaying your taxes, hopefully at a lower rate.
https://www.whitecoatinvestor.com/roth-conversions/
No, I am trying to figure out how to avoid the pro-rata conflict. Luckily I looked through more of your posts and found out the best way to do it would be to roll our IRAs back into our current 401ks and then we can start doing backdoor Roth conversions. Thanks for all the posts!
The pro-rata rule only matters if you have pre-tax and post tax (non-Roth) IRAs, like when you are doing a backdoor Roth contribution.
If all the IRAs are pre-tax , then you can convert money in any of the IRAs and there is no pro-rata to worry about.
Yes you can. But honestly, if you’re saving up enough to retire in your 30s or 40s, you’re not going to get it all into retirement accounts practically speaking.
Their definition of retirement is very different than yours and mine. 95% of the people I’ve talked with who claim to have FIREd or are attempting it are planning to live extremely frugally and/or continuing to generate earned income for years to come. The remaining 5% had sold their business. One blogger nicely phrased it like this – “It sounds more like a thoughtful career change than actually retiring.”
The vast majority had under $1M in assets at the time, so it’s unlikely you’ll want to trade places with them.
Pretty ridiculous that this post needed to be written and scary how much shorty advice there is out there. Shows once again that you need to have enough knowledge to tell good and bad advice apart. The beautiful thing is that once you reach that point, you can usually manage your own finances better than anyone else.
Enjoyed your “defense” of retirement accounts!
This isn’t a good look for this CFP — either he is making a pretty basic error with is math, or worse, he’s deliberately distorting the data to suit his purposes. Thanks for setting the record straight.
Retirement accounts are clearly a great wealth building strategy. Unless the investor has access or the ability to invest in high yield classes like business or real estate, retirement accounts will almost always win.
I always maxed out my retirement accounts while working. My taxable account is 3X the size of my retirement accounts. I only used one retirement account. In my peak earning years I invested aggressively into my taxable account because the tax deferred was limited. I worry about RMDs because I have to worry about something I guess. Any way I want to give a shout out to FiPhysician who has some awesome software that helped me develop a better Roth conversion strategy. Those of us in my age bracket (63) usually have very significantly less saved into Roths since most of our saving careers these accounts did not exist. One can worry about RMDs but still max out the retirement space.
Don’t worry! It work work out and be OK!!!!
If you are a high earner then its almost moot. Assuming you save at a fairly high rate, like your savvy readers, then you’ll easily max out every available qualified retirement account and still have most of your savings to put into real estate, a side business and/or a taxable brokerage account. That’s unless you have access to deferred compensation plans or some other exotic option most of us didn’t have. That way you’ll have tax savings as well as a lot of flexibility. I’ve got a mix of all types of qualified and taxable brokerage accounts and my only problem is to figure out the optimum withdrawal strategy if I ever have to start withdrawing.
Apparently people that recommend taxable accounts over retirement accounts don’t understand basic math? The only argument for taxable vs retirement accounts is that people want liquidity which is an impossible argument to win. Really wish you would share the advisor’s name so we could recommend avoiding them like the plague.
There are a couple of other points that I’ve come across that we need to either defend retirement accounts against or concede the argument.
1. If someone has debt to get rid off, it might make sense to only contribute enough to get the match and throw everything else into getting out of debt.
2. People who’re here on a temporary work visa often decide not to contribute their money to their retirement accounts as they do not know where they’ll end up in their later years. I’m on a work visa myself, but I’m maxing out my US retirement accounts because I’m sure I’ll eventually get a green card. Right? RIGHT? If someone has to leave the country, then there are complications on whether they’ll have access to their 401k money. Some places (like Fidelity) let you keep your account, but others do not.
*Complications on how you’ll have access to your money, not whether you’ll have access to your money. You’ll always have access to your money, cause your money is your money.
1. Agree, at least for high interest debt. Maybe not a 2% mortgage or 3% student loan or something so long as you have a plan to take care of those in a reasonable period of time.
2. It can be complicated and varies by country, but for the most part, you can just leave it here and pay US taxes on the withdrawals.
What about people under the 80k household limit? 0% cap gains and long term dividends is a big deal.
It makes sense to still max out your Roth first in this case, but some taxable investments to take advantage of your low income or even loss harvesting could be wise, no? You would also have access to this money with less strings for a new roof, rental property, etc.
If you get close to the income limit, just shift the money perhaps. I like having 3 pots to work with.
Is this dumb?
Almost irrelevant as a reason to SKIP retirement accounts. But yea, it’s a nice benefit of having both accounts later, which more FIRE types do and will.
But you should max out retirement accounts first even if FIREing.
https://www.whitecoatinvestor.com/early-retirees-max-out-retirement-accounts/
I started my career working for a small business owned by my family that did not have a safe harbor plan, so I was very limited in what I could put in the 401(k). I’ve since started working for the government and I max out the TSP the past 2 years
Before I got into the government, I was probably 50/50 Taxable/Tax Advantaged
Today, it’s closer to 25% taxable /75% tax advantaged with an overall value that is about 25% higher. But a healthy portion of that 75% is Roth and much of it is direct contribution to Roth IRA or Roth 401k that was rolled over to a Roth IRA. Some of the TSP is Roth, too.
If I sell my current real estate, taxable goes up in ratio, If I purchase different real estate, then my taxable account will go down. If I get promoted, then my taxable account will start to build up again because there’s no more that I can put in a retirement account, though the employer match would grow as salary increases.
At this point, I’d have to experience a major financial windfall to want to retire prior to being pension-eligible and taking that lifetime FEHB, so none of it really matters. I don’t see any reason not to max out the retirement accounts. But, if for some reason I did experience a windfall that encouraged me to abandon my career, I don’t think accessing retirement accounts penalty-free will be something that I’m going to be remotely concerned about. There are enough options to avoid the penalty, and there will be enough in Roth that is going to be accessible without income tax or early withdrawal tax.
Rather generous to offer the possibility of a mistake, but I’m doubtful any CFP would make it.
It’s far more likely he/she is pitching non-mainstream investments to FIRE clients that you wouldn’t recommend for the typical investor. Saying “and honestly, who the hell wants to retire at 60+?” is clearly not offering a traditional retirement path. If the goal is early retirement, you wouldn’t be planning to pay the bills with tax deferred accounts. That difference alone would make the statement true because the assumptions are entirely different.
What’s the response to the tweet after tacking on “…for people who want to retire before age 50?”
Good problem. Having a very large Ira and converting to the top of 24% bracket and some excess distributions with an 18% effective tax rate
Should I do more into the 32% at age 70
Depends. My recollection is that you are mostly now investing for your heirs, so it really depends on their likely tax brackets at receipt/withdrawal.
omg, this is appalling. Although did this dude mean avoiding traditional retirement accounts likely a traditional IRA or traditional 401k?
was his point that you should prefer Roth retirement accounts? I’m hoping to god he thought the discussion was traditional vs Roth rather than traditional vs, taxable.
but if he is really saying taxable beats retirement accounts, then I bet he’s not that stupid as an MBA/CFP (I hope- what are these degrees teaching!) but likely trying to sell things like whole life insurance or annuities.
Sensible and reasonable post on retirement accounts. I continue to learn something new every day! I currently consider my financial/investing education to be my side gig!
I have been an independent contractor my entire career. I hired my wife several years ago and set up a 100% deferral for her 401k, $19.500 this year. She turned 50 this year. Does anyone know if she is eligible for the additional contribution of $6500 for “catch up”? Please advise. Thank You!
It’s a very well paying hobby isn’t it?
Literally had a long convo with my sister in law the other day about this.
Not only had her long term boyfriend (15 years now?…ugh) talked her into prioritizing taxable over just filling her 401K and roth IRA (which she has NEVER come close to doing), he has her trying to market time with the limited money she is putting in…she has almost no knowledge of the stock market, doesnt make an attempt to learn about any individual stocks or trends, but this guy has her convinced that the “buy low sell high” method will make her rich because he has flipped a house or two in his days…after asking what individual stocks they were targeting, the lack of any plan or pre-planning was scary.
In a way, it made me so thankful for sites like these (I follow a few of the FIRE types) and having a handbook to not waste dollars frivolously has been nice, so thanks WCI and those like you.
We had a very long chat, and I think I was able to steer her right. My big pitch…”listen, I am a couch potato investor; I dont pay a lot of attention, I fill up tax-advantaged accounts, in low cost index funds, and I dont stress about timing the market; when they are full, I fill taxable accounts with the same method” and I think that was enough, as she was starting to see how daunting it can all be. The “you can be lazy like me!” pitch worked, I think…
As someone who has stopped adding to my tax-deferred accounts, this post is an extremely fair analysis of the concept. Nice job!
The one part I would add to is #2 on flexibility. There are ways to use your taxable account without selling your investments or paying taxes – something that cannot be compared to withdrawing from an IRA and paying the taxes+penalty.
Examples:
1. A little over a year ago I nearly lost a real estate transaction and earnest money due to a credit union giving me a hard time late in the mortgage process about requiring an auditing P&L statement. If my 403b had been in a taxable account, I could have paid for the real estate transaction using a margin loan against my investments, completed the transaction stress-free, and found a more reasonable lender within a month or two to pay back the margin loan. I didn’t end up losing the transaction but it was a stressful, argumentative, and time-consuming process. The flexibility of a large taxable account would have relieved this.
2. For those following traditional personal finance guidelines of building a 6-month cash emergency fund before maxing out investments, relying instead on a margin loan against a taxable account completely eliminates the cash drag from an emergency fund. Using your example of 7.5% return for 30 years and assuming a $60,000 emergency fund, this equates to a $525,297.31 benefit after 30 years for the taxable account. Actually, with the numbers in your example, it completely wipes out the advantage of the 401k.
3. When advanced paper asset strategies like selling options are used, the taxable account has a chance to use their money twice. For example, I have a large amount of cash that is sitting in a money market account being used to secure a short put strategy that represents being fully invested in the market. I am taking a portion of this cash to pay down my mortgage, and then I am taking out a HELOC that I would only need to draw on to put back in the taxable account if the market drops more than 50%. In this way I am saving hundreds of thousands in mortgage interest over the 30-year term so long as there is not a >50% market drop. If the market does drop I simply go back to having a mortgage again. To be fair, this is a complicated and time-consuming active management strategy that might not be for everyone and certainly is not worth the time unless you have a relatively large account.
1. Yes, it is a nice benefit to be able to borrow against a taxable account. It is also nice to be able to tax loss harvest and get a step up in basis at death.
2. The problem with a margin loan is it tends to disappear/get smaller right when you need it, when the economy goes to pieces. Emergency funds aren’t about the return on your money, they’re about the return of your money. It’s a bit like an insurance policy, you know it’s going to cost you something. If you’re worried about what your emergency fund could be earning you, it’s probably too big.
3. That’s just investing on leverage. And since it’s only for those with a relatively large account, those who can do it probably don’t need to!
The pro-rata rule only matters if you have pre-tax and post tax (non-Roth) IRAs, like when you are doing a backdoor Roth contribution.
If all the IRAs are pre-tax , then you can convert money in any of the IRAs and there is no pro-rata to worry about.