A 63-Year-Old’s $60,000 in After-Tax 401(k) Savings Could Be Taxed Twice Without One IRS Form

Quick Read

• After-tax 401(k) contributions moved into a traditional IRA can be taxed again unless Form 8606 is filed to document the nondeductible basis.

  

• IRS guidance allows retirees to split a rollover, sending after-tax dollars directly to a Roth IRA tax-free while pre-tax money goes to a traditional IRA.

• Combining after-tax and pre-tax IRA money triggers the pro-rata rule, making every withdrawal and Roth conversion more complex for many years until required minimum distributions end.

• At the national average savings rate, $40,000 earns about $150 a year. In one of the top-rated high-yield accounts available now, the same balance earns $1,200 or more. Compare current best rates side by side.

A 63-year-old preparing to retire has spent years making extra after-tax contributions to his 401(k) on top of his regular pre-tax savings. Those contributions now total $60,000. His plan will send him a rollover packet, and his IRA custodian will accept the money, but no one in that process is required to tell the IRS that those dollars were already taxed. If the $60,000 goes into a traditional IRA and he never records it, every future withdrawal will be treated as though it were pre-tax money. That means income tax on the same dollars a second time.

This is a frequent mistake for disciplined savers who have maxed out their workplace plans. Moving a 401(k) into an IRA usually helps avoid tax on the account balance, so many people assume the after-tax portion is automatically protected. It is only protected if the saver takes the right steps.

Why After-Tax Dollars Can Disappear in a Standard Rollover

After-tax 401(k) contributions are separate from Roth 401(k) money. The contributions themselves have already been taxed, but any earnings on them remain pre-tax. Once everything is rolled into one traditional IRA, the custodian has no way to identify which dollars were already taxed. The IRS treats the entire balance as taxable unless Form 8606 is filed to establish the nondeductible basis.

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The account mix is becoming even more complicated for workers in this age group. Employees age 60 to 63 can make catch-up contributions of up to $11,250, and anyone who earned more than $150,000 must direct catch-up contributions to a Roth 401(k). Late-career savers can end up with pre-tax, Roth, and after-tax money all inside the same plan.

A Clean Split Is Better Than Years of Basis Tracking

The key question is whether the $60,000 stays separated from pre-tax money or gets mixed in permanently. If after-tax money lands in a traditional IRA, the pro-rata rule applies: every withdrawal contains a mix of taxable and tax-free dollars, with only a proportional part coming out tax-free. Suze Orman has warned that anyone with pre-tax IRA money who converts will "have to pay taxes when you convert according to a pro rata formula."

That basis must be carried forward on Form 8606 every year money is taken out. For someone born in 1963, required minimum distributions begin at age 75 under SECURE 2.0, so the recordkeeping could last for two or three decades. Papers get misplaced, tax preparers change, and heirs often do not know the basis exists.

Option One: Move the $60,000 Directly to a Roth IRA

For many people in this situation, this is the strongest choice. IRS guidance from 2014 allows a single 401(k) distribution to be split so that after-tax contributions go directly to a Roth IRA while pre-tax money and earnings go to a traditional IRA. The $60,000 can then grow tax-free without any later basis tracking.

Clark Howard gave a caller the same advice: "If it's after-tax money, you could roll it into a Roth IRA. And that's what I would do."

Roth IRAs have no lifetime required minimum distributions for the original owner, so the money can remain untouched as a reserve for later retirement or pass tax-free to heirs. One important detail remains: Roth earnings are generally tax-free once you are at least 59½ and the account has been open for five years. If he does not already have a Roth IRA, opening one now starts that five-year clock.

Option Two: Traditional IRA With Form 8606 Filed Each Year

Rolling everything into a traditional IRA and filing Form 8606 does prevent double taxation, but it is still the weaker route. It sacrifices tax-free growth on the $60,000, locks the saver into pro-rata calculations for every withdrawal and future Roth conversion, and adds a paperwork requirement. If that filing is missed, the error may never be caught. This approach generally makes sense only when a plan will not process split distributions, and that should be confirmed in writing before accepting the rollover.

What to Do Before the Rollover Check Is Issued

Begin by reviewing the latest 401(k) statement to find the after-tax contribution total, which should be listed separately from earnings. Then ask for a written direct rollover that sends the after-tax contributions to a Roth IRA and the remaining money to a traditional IRA. After the transfer, make sure Box 5 on Form 1099-R shows the after-tax amount correctly.

Second, if after-tax money was rolled into a traditional IRA in prior years without filing Form 8606, file it now to establish the basis before any withdrawals begin. The most expensive mistake is accepting the plan’s default one-destination rollover.

If you made nondeductible IRA contributions over several years and have already taken distributions, a CPA who can reconstruct your basis may help recover taxes that would otherwise be paid twice.