How After-Tax Basis and Form 8606 Affect IRA, Pension, and Annuity Taxes

(UNITED STATES) The tax rules for after-tax basis in IRAs, pensions, and annuities decide how much money comes out tax-free and how much gets taxed again. For immigrants, workers on visas, and non-citizens with a valid SSN or ITIN, the rules matter just as much as they do for U.S. citizens.

A missed filing or a bad rollover can turn a tax-free recovery into a full taxable distribution. Form 8606 sits at the center of that system for traditional IRAs and Roth conversions, while pension and annuity payments rely on exclusion rules that spread basis over time.

How the basis system works from the first contribution

The journey starts when money goes in. If you make a nondeductible contribution to a traditional IRA, that contribution creates basis. The IRS does not tax that money again when you take it out, but it does tax earnings and deductible contributions.

For 2026, the contribution limit is $7,000, or $8,000 if you are age 50 or older. The income phaseouts begin at $79,000 MAGI for single filers covered by a workplace plan and $126,000 for joint filers in the same situation.

Tracking matters because retirement accounts often mix taxable and nontaxable money. That is common for immigrant workers who contribute while holding an ITIN or SSN and moving between jobs, visa categories, or employers.

The IRS Publication 590 series explains the rules, and analysis by VisaVerge.com has noted that mixed-funding accounts often create the most filing mistakes for new arrivals and long-term residents alike. For official guidance, review the IRS retirement page at IRS Retirement Plans and IRAs.

Why Form 8606 decides the tax bill

Form 8606 records nondeductible IRA contributions, calculates taxable distributions, and reports Roth conversions. It has three main parts. Part I tracks basis. Part II calculates taxable IRA distributions. Part III reports conversions and recharacterizations.

The form is not optional when basis exists. If it is missing, the IRS can treat the full distribution as taxable. That creates avoidable tax, possible penalties, and a paper trail problem that follows later withdrawals.

A simple example shows the effect. Maria, an immigrant with an ITIN, contributes $5,000 nondeductibly to a traditional IRA in 2026. She files Form 8606 and records that amount as basis. Two years later, she withdraws $10,000 from an IRA worth $50,000, with $15,000 total basis. Her nontaxable share is $3,000, and $7,000 is taxable.

That pro-rata calculation is the heart of many rollover pitfalls. You cannot choose only the after-tax portion. The IRA is treated as one combined pool.

The IRS also finalized e-filing rules for returns that claim IRA basis, which reduces paper errors and missing schedules. Good records still matter. Bank statements, prior Forms 8606, and year-end statements give proof if the IRS asks questions later.

Pensions and annuities recover basis in smaller slices

Pensions and annuities work differently. Instead of one withdrawal formula, the taxpayer recovers basis over time through an exclusion ratio or the simplified method. The result is the same: a portion of each payment stays tax-free until the basis runs out.

Qualified pensions often use pre-tax dollars, but after-tax employee contributions still create basis. Non-qualified annuities usually begin with after-tax money, so the exclusion rule applies from the start.

For many annuities that began after November 18, 1996, the simplified method is common. It allows a fixed monthly amount to be excluded until the full basis is recovered. IRS Publication 575 and its tables control the calculation.

Ahmed, a non-citizen retiree, contributed $20,000 after-tax to a pension over 30 years. His annual payment is $24,000, and his expected return is $480,000. His exclusion ratio is 4.17%. That means $1,000 a month comes out tax-free until the basis is exhausted.

Inherited accounts follow separate rules. A surviving spouse can often treat the account as their own or choose required distributions. A non-spouse beneficiary usually faces the 10-year rule, with the full account emptied by the end of year 10 after the owner’s death.

Required distributions change the pace, not the basis

Required minimum distributions, or RMDs, start at age 75 for people born in 1960 or later under SECURE 2.0. Roth IRAs remain exempt during the owner’s lifetime.

Basis still matters with RMDs. It reduces the taxable portion of each payout on a pro-rata basis. IRS guidance for 2026 uses updated lifetime tables and examples that apply the formula RMD x (1 – basis/value).

That matters for inherited IRAs too. Non-spouse beneficiaries now face annual payout periods in years 1 through 9 in many cases, then full distribution by year 10. The tax burden arrives faster when basis is low and the account holds mostly pre-tax money.

Roth IRAs keep the after-tax basis simple

Roth IRAs are the cleanest version of the after-tax basis idea. Contributions go in after tax, so they create basis immediately. Qualified withdrawals are completely tax-free once the account owner is at least 59½ and the five-year clock has run.

Form 8606 still matters for Roth conversions and certain distributions. The ordering rules also matter. Roth withdrawals come out in this order: regular contributions, conversion amounts, then earnings. That protects original contributions first and taxes earnings last.

Rollover pitfalls that can trigger a tax bill

• 60-day rule: The money must reach the new account within 60 days.
• Once-per-12-months rule: Indirect IRA-to-IRA rollovers are limited.
• 20% withholding: Indirect pension rollovers can trigger automatic withholding.
• Inherited account limits: Non-spouses cannot roll inherited money into their own IRA.
• Pro-rata rule: You cannot isolate basis and move only the after-tax part.

A direct rollover of $50,000 with $10,000 basis can be tax-free. An indirect failure can make $40,000 taxable immediately, while $10,000 held back as withholding must be claimed later on Form 1040.

Those are the rollover pitfalls that catch workers after job changes, layoffs, or plan transfers. They also appear when people move between employers while holding temporary status and do not want money trapped in a former plan.

Forms and deadlines that keep the record clean

• Form 1099-R reports distributions, usually by March.
• Form 8606 reports basis and conversions and is due with the return.
• Form 5329 reports excess contributions and RMD failures.

Immigrant taxpayers should keep every year’s Form 8606. One missing form can make the IRS assume zero basis. That is an expensive assumption.

For official filing details, use Form 8606 on IRS.gov, which explains when the form is required and how basis is reported.

What this means for immigrants and visa holders

Stable work status keeps retirement planning alive. Non-citizens with valid SSNs or ITINs can contribute to eligible accounts if they have earned U.S. income. Job changes, visa pauses, and layoffs raise the risk of early withdrawals and rollover mistakes.

That is why recordkeeping matters from the first paycheck. It also explains why many advisers tell clients to move old plan money directly, keep copies of every statement, and reconcile each year’s basis before retirement starts.

According to analysis by VisaVerge.com, the biggest losses usually come not from market swings, but from paperwork failures, missed basis tracking, and rushed rollovers after employment changes.

The rules are technical, but the path is straightforward. Track basis every year. File the right forms. Move money the right way. Avoiding rollover pitfalls protects the part of your retirement savings that was already taxed once.