Avoid This IRA Distribution Error to Protect Your Retirement Cash

A distribution from your traditional IRA could cost you if you’re not aware of your responsibilities.

Why it matters: Many investors are saving up for their retirement in workplace accounts like 401(k)s. Those administrators handle tasks that IRA custodians don’t. And it’s up to you to take charge and keep track of your hard-earned money, so you’re not taxed twice.

Denise Appleby is known as “The IRA Whisperer.” The Morningstar contributor has written about how to protect your IRA from costly mistakes.

7 Questions on How to Prevent IRA Distribution Mistakes

1. Let’s start a quick explainer. What is a traditional IRA, and how can someone fund their account?
2. There are situations when a traditional IRA can hold pretax and aftertax money. If someone has both in their account and withdraws money, how is the cash distributed?
3. The IRA custodian or brokerage makes the distribution, but their responsibilities are different from a 401(k) administrator when it comes to tracking aftertax dollars. Can you explain?
4. What should retirees and other folks pay attention to when they receive their 1099-Rs from their IRA custodian?
5. The IRS advises taxpayers to file Form 8606 when they make distributions from a traditional IRA. What is Form 8606, and why is it important?
6. What records should people keep track of to ensure they’re not paying income tax on tax-free retirement money?
7. What’s the takeaway to avoid costly mistakes in IRAs?

Key Quote on Distributions From 401(k)s to IRAs

When you’re ready to take a distribution from your 401(k), ask the plan administrator for a copy of your statement. You want the most recent statement. You’re going to look at that statement. And one of the things you’re looking for is: Do I have any aftertax balance in my 401(k)? And if you do, say to your plan administrator, “I want a split distribution. Send my pretax amount to my traditional IRA”—assuming that you want a nontaxable transaction—“Send my pretax amount to my traditional IRA, and send my aftertax amount to my Roth.” Now they might say, “You’re not doing two direct rollovers. We don’t have time for that.” And then you say, “OK, send the pretax amount to my traditional IRA, send the aftertax amount to me. And then I will roll it over to my Roth IRA within 60 days.”

Why am I saying you should roll it to your Roth IRA? Because there’s a big debate about whether or not someone should do a Roth conversion. And we know, ideally, you want to do an analysis, a suitability analysis, to determine if a Roth is right for you. But when it comes to your aftertax amount, there’s no debate. Roll your aftertax amount to your Roth IRA. That’s a tax-free Roth conversion. No question, everybody wants that.

The Takeaway: Saving in an IRA allows earnings to grow tax-deferred until it’s time to pay taxes when you make withdrawals. Appleby says don’t lose the benefit of saving on taxes with poor recordkeeping of aftertax money. Now, this applies to investors who have both pretax and aftertax cash in their accounts. Some will have only pretax money in their IRAs, so they’re fine. The Morningstar contributor recommends you hold on to copies of your tax returns; Form 5498s, which IRA custodians use to report your contributions; and 1099-Rs, which your tax preparer will need to check.

More From Morningstar on IRA Distributions and Tax Planning in 2026

Appleby calls Form 8606 the best tool to avoid double taxation. Here’s how it works: A person makes a nondeductible contribution and tells their tax preparer, who fills out Form 8606 with the amount. If the person does a Roth conversion or takes a distribution, their tax preparer adds the transaction to a new Form 8606 and then states how much of the distribution or Roth conversion is tax-free based on historical data.

Read about IRA rules and important tax deadlines for 2026. Watch tax and IRA expert Ed Slott explain what’s on deck for taxes in 2026. And be sure to bookmark Morningstar’s annual guide for tax-planning and IRA resources.

Coming up: Investing Insights’ new personal finance series will return on March 6. Morningstar Lead Editor Margaret Giles and Morningstar Director of Personal Finance Christine Benz will discuss strategies to get organized this tax season. If you missed their previous conversations about how to streamline your financial life, watch How to Make the Most of Your IRA in 2026 and 4 Financial To-Dos to Kick Off the New Year.