How a 63-Year-Old’s $60,000 in After-Tax 401(k) Savings Could Face Tax Twice Without One Key Form

After-tax 401(k) contributions have already been taxed once, but a routine rollover into a traditional IRA can expose them to tax again. One little-known form can determine whether a retiree avoids that second hit.

A 63-year-old who plans to retire this fall has spent years contributing extra money to his 401(k) on an after-tax basis, in addition to regular pre-tax savings. Those contributions now total $60,000. His plan administrator will process a rollover, and his IRA custodian will accept the funds, but no one in that chain will automatically tell the IRS that tax was already paid on those dollars. If the money goes into a traditional IRA without being documented, every later withdrawal can be treated as pre-tax income. That means the same dollars could be taxed twice.

It is a frequent mistake for diligent savers who have maxed out workplace plans. Many people assume that a 401(k)-to-IRA rollover automatically preserves the after-tax portion correctly, but that only happens if the owner takes the right steps.

Why After-Tax Contributions Get Lost in a Standard Rollover

After-tax 401(k) contributions are separate from Roth 401(k) money. The original contributions have already been taxed, but any earnings tied to them are still pre-tax. Once everything lands in a traditional IRA, the custodian does not know which dollars were already taxed. Unless Form 8606 is filed to record nondeductible basis, the IRS treats the full amount as taxable.

These accounts can be especially complex for workers approaching retirement. Catch-up rules now allow employees ages 60 to 63 to contribute up to $11,250 in 2026, and anyone who earned more than $150,000 in 2025 must direct catch-up contributions to a Roth 401(k). By the end of a career, a saver may have pre-tax, Roth, and after-tax money all in the same plan.

Why Separating the Money Is Better Than Tracking Basis for Decades

The key question is whether the $60,000 stays mixed with pre-tax money or is kept separate. If it is blended into a traditional IRA, the pro-rata rule applies: every distribution includes a taxable and nontaxable portion in proportion to the overall account balance. 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 then has to be tracked on Form 8606 each year a distribution is taken. For someone born in 1963, required minimum distributions begin at age 75 under SECURE 2.0, so the recordkeeping could stretch across decades. Paperwork can disappear, tax preparers can change, and heirs may never realize the basis exists.

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

For most people in this situation, the strongest option is to send the after-tax amount to a Roth IRA. 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. Under that approach, the $60,000 moves tax-free, continues growing tax-free, and does not require future basis tracking.

Clark Howard offered a caller similar advice: “If it’s after-tax money, you could roll it into a Roth IRA. And that’s what I would do.”

Roth IRAs do not require lifetime RMDs for the original owner, so the money can remain available as a reserve for later retirement or as a tax-free inheritance. One important detail still applies: Roth earnings are generally tax-free only after age 59½ and once the account has been open for at least five years. If there is no existing Roth IRA, opening one starts that five-year clock.

Option Two: Use a Traditional IRA and File Form 8606 Every Year

Rolling everything into a traditional IRA and filing Form 8606 can prevent double taxation, but it is still the weaker route. It sacrifices the chance for tax-free growth on $60,000, leaves the owner subject to pro-rata calculations on future withdrawals and Roth conversions, and creates an ongoing paperwork duty that can be missed without warning. This approach generally makes sense only if the retirement plan will not allow split distributions, something worth confirming in writing before accepting the rollover.

What to Do Before the Rollover Happens

First, review the latest 401(k) statement to identify the after-tax contribution amount, which should be listed separately from earnings. Then request a direct rollover in writing so the after-tax contributions go to a Roth IRA and the rest goes to a traditional IRA. After the transfer, confirm that Box 5 on Form 1099-R shows the after-tax amount correctly.

If after-tax money was already rolled into a traditional IRA in prior years and Form 8606 was never filed, submit it now to establish the basis before any withdrawals begin. The biggest mistake is accepting the plan’s default one-account rollover.

For anyone who has made nondeductible IRA contributions over several years and has already taken distributions, a CPA who can reconstruct the basis may help recover tax that would otherwise be paid twice.