Table of Contents
- Case A — All pre-tax 401(k) funds rolled to a Traditional IRA via Direct Rollover
- Case B — Mixed after-tax and pre-tax contributions rolled to Traditional IRA
- Case C — Roth conversion from 401(k) with after-tax contributions
- Resolution & Pathing — The right destination depends on two variables
- Final Compliance Verdict on 401(k) Cost Basis Rollovers
Case A — All pre-tax 401(k) funds rolled to a Traditional IRA via Direct Rollover
Lead with an investment option audit: You should understand how a clean, direct rollover can preserve tax deferral and simplify cost-basis tracking. The right choice often hinges on keeping pre-tax money in tax-deferred space while avoiding unnecessary withholding. For guidance on suitability, consider consulting the Advisor Rollover Suitability Form to tailor the path to your scenario, and review the Financial Planning Rollover Workbook for a step-by-step planning framework.
In this Case A, the 401(k) balance is $100,000 consisting entirely of pre-tax contributions. A direct rollover to a Traditional IRA preserves the tax-deferred status with zero current tax impact and zero withholding. There is no 60-day window to manage because the transfer is trustee-to-trustee. The cost basis in the new Traditional IRA remains $0 because there were no after-tax contributions in the original plan.
| Case | 401(k) Balance | After-Tax Basis | Pre-Tax Balance | Rollover Destination | IRA Cost Basis | Withholding (if indirect) | 60-day Window |
|---|---|---|---|---|---|---|---|
| Case A | $100,000 | $0 | $100,000 | Direct to Traditional IRA | $0 | 0% | N/A |
| Case B | $120,000 | $30,000 | $90,000 | Direct to Traditional IRA | $30,000 | 0% | N/A |
| Case C | $150,000 | $40,000 | $110,000 | Roth IRA via Roth conversion | $40,000 | 0% | N/A |
Source: IRS Publication 590-A, 2026
Case B — Mixed after-tax and pre-tax contributions rolled to Traditional IRA
This scenario involves a 401(k) balance of $120,000 with $30,000 of after-tax contributions and $90,000 of pre-tax contributions. A direct rollover to a Traditional IRA keeps the pre-tax funds tax-deferred and transfers the after-tax basis as the cost basis in the new IRA. The cost basis in the IRA equals $30,000, representing the after-tax portion that can be recovered tax-free when distributions are taken in relation to the after-tax basis. The pro-rata rule applies to any future distributions: the tax-free portion equals the ratio of basis to total IRA balance at the time of distribution.
Example: If a $60,000 distribution occurs in the future, the tax-free portion equals 30,000 / 120,000 = 25%, and the taxable portion equals 45,000. The tax treatment depends on your current marginal bracket and any penalties if distributions occur before age 59½. For planning purposes, you can model the effect of distributions using the same cost-basis ratios, and reference the 60-day rollover rule when considering indirect options, though the direct rollover path avoids withholding entirely.
To support compliance planning, you can leverage the Financial Planning Rollover Workbook and consult the Advisor Rollover Suitability Form to tailor this path to your client profile.
| Case | 401(k) Balance | After-Tax Basis | Pre-Tax Balance | Rollover Destination | IRA Cost Basis | Taxable Distribution (if taken today) | Tax-Free Distribution (if taken today) |
|---|---|---|---|---|---|---|---|
| Case B | $120,000 | $30,000 | $90,000 | Direct to Traditional IRA | $30,000 | Depends on distribution amount | Depends on distribution amount (up to $30,000 basis) |
Source: IRS Publication 590-A, 2026
Case C — Roth conversion from 401(k) with after-tax contributions
This scenario uses a 401(k) balance of $150,000 with $40,000 of after-tax contributions and $110,000 of pre-tax contributions. A Roth IRA conversion transfers the after-tax basis tax-free and taxes the pre-tax portion at your marginal rate. The cost basis in the Roth equals the $40,000 after-tax basis, which is not taxed on conversion. The $110,000 of pre-tax funds become taxable in the conversion process.
Key calculation: Taxable amount = 110,000 × your marginal rate. After-tax basis of 40,000 remains tax-free in the Roth, representing the portion that can come out tax-free in future qualified distributions. This path is often chosen when the long-term objective is tax-free growth and access to Roth-protected assets.
To help ensure the conversion aligns with broader planning goals, consider using the Plan Rollover Audit Sheet and partnering with your advisor via the Advisor Rollover Suitability Form.
The Open Question — Two variables that determine the best path
- Variable 1: Do you have after-tax contributions within the 401(k) that you want to preserve as tax-free basis in the new account?
- Variable 2: Is your objective to maximize tax deferral now (Traditional IRA) or to achieve tax-free growth later (Roth conversion)?
Resolution & Pathing — The right destination depends on two variables
Based on the two variables above, the recommended path is as follows: - If after-tax basis exists and you prefer tax-free growth, execute a Roth conversion for the after-tax portion while paying tax only on the pre-tax portion being converted. - If your priority is preserving tax deferral and you lack post-tax basis, execute a direct rollover to a Traditional IRA.
You should verify eligibility and timing using the Qualified Plan Eligibility Memo and confirm plan-level rollover approvals before initiating. For a detailed, step-by-step execution plan, follow the compliance-check approach in the Plan Rollover Audit Sheet and schedule a rollover readiness review with your advisor using the Advisor Rollover Suitability Form.
Source: IRS Publication 590-A, 2026
FAQ
Do I lose my original cost basis after a rollover?
No, you do not lose your original cost basis when you roll over to a Traditional IRA; the after-tax basis transfers to the new account and remains part of the cost basis for future distributions. If your 401(k) included after-tax contributions, that basis carries over and is used in proportion to the total IRA balance under the pro‑rata rule. For example, with $30,000 of after-tax basis in a $120,000 IRA, a future $60,000 distribution would have 25% tax-free (30,000 / 120,000 = 0.25) and 75% taxable, depending on your marginal rate. See IRS Publication 590-A for details on cost basis handling. IRS Publication 590-A, 2026.
Final Compliance Verdict on 401(k) Cost Basis Rollovers
The safest, fully compliant path to preserve tax treatment is a direct trustee-to-trustee rollover from the 401(k) to a Traditional IRA when there is no after-tax basis in the 401(k). If there is after-tax basis, that basis transfers to the new IRA and distributions follow the pro-rata rule; a Roth conversion can preserve the after-tax basis tax-free but taxes the pre-tax portion at your marginal rate, and it should only be pursued when tax goals align with long‑term Roth growth. For concrete execution steps, verify plan eligibility and timing via the Qualified Plan Eligibility Memo, insist on a direct rollover to avoid withholding, and use the Plan Rollover Audit Sheet to guide readiness and approvals. See the IRS publications noted in the body for exact calculations and rules. If you need a guided, compliance-focused plan, consult the Plan Rollover Audit Sheet linked in the article. IRS Publication 590-A, 2026.
Action steps you should take next: confirm whether you have after-tax basis in your 401(k) that you want to preserve, obtain plan-level rollover approvals, choose whether you want to preserve tax deferral (Traditional IRA) or pursue tax-free growth (Roth conversion), and schedule a rollover readiness review with your advisor using the internal tools linked in the article. For a structured execution path, see the Advisor Rollover Suitability Form and Plan Rollover Audit Sheet referenced throughout the content.