pro rata

DEFINITION: The phrase “pro rata” refers to a proportionate allocation of something, usually, in the financial context, of funds.

Essentially, “pro rata” signifies the allocation of something in parts or portions that are proportionate according to some criterion, such as ownership.

For example, when something, such as dividends or interest, is due to be distributed to individuals on a pro rata basis, it means that the distribution will be divided up according to some metric, which in this case will be each individual’s proportionate share of the principal.

While pro rata calculations can be applied to determine suitable divisions within any whole, they are commonly employed in the domains of finance, business, and law.

ETYMOLOGY: English use of the Latin phrase “pro rata” is attested from the late sixteenth century.

It derives directly from the classical Latin phrase, pro ratā (parte).

The preposition pro means, in this sense, “according to” or “in proportion as.”

The modifier ratā—meaning “reckoned,” “determined,” “fixed,” or “settled”is the feminine, ablative case, past participle of the deponent verb reor, rēri, meaning “to reckon.”

The word ratā is in the ablative case because pro governs that case and it is feminine because the noun it is understood to modify—namely, parte, meaning “part”—possesses that grammatical gender.

The word ratā also appears in classical Latin in the form of the ablative absolute ratā parte, with the same meaning as pro ratā.

USAGE: The phrase “pro rata” signifies the principle that every individual or entity obtains its fair portion relative to the entirety.

Note that, in this context, at least, the word “fair” does not necessarily mean “equal,” but rather “just” or “merited,” meaning “correct according to a given standard or criterion.”

Pro rata calculations are applicable in various domains. A common example is distributing dividends according to the size of one’s share in the ownership of the whole company.

Thus, the concept of “pro rata” presupposes a whole that must be divided and a criterion according to which a fair (i.e., just) proportionate distribution may be determined.

Likewise, pro rata calculations can be employed to distribute the appropriate segments of an annual interest rate over a shorter duration.

As an example of the use of pro rata in a non-financial context, consider the insurance industry. Here, the phrase “pro rata” may be used to determine the premium amount payable for a portion of the full term covered by a policy.

Similarly, pro rata calculations may be involved in such things as tax bills, which may be assessed over only a portion of a whole term (typically, a year).

Finally, the concept of “pro rata” is also used to calculate the portion of a distribution from a qualified retirement account—such as an IRA, an SEP, or a 401(k)—which becomes subject to taxation, accounting for the mixture of funds that have been contributed before and after taxes.

For example, consider an individual holding a 401(k), 20 percent of whose funds are contributed pre-tax and 80 percent post-tax. As a result, any withdrawals made will be have to be composed of 20 percent taxable funds and 80 percent funds not subject to taxation.