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February 17, 2009

After-tax contributions

Your Guide

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Definition

Contributions made to a participant’s retirement account from assets that have already been subject to income tax. For Traditional IRAs, these are referred to as nondeductible contributions. For qualified plans, such as 401(k) plans, and 403(b) plans, these are referred to as after-tax contributions.

After-tax balances are also referred to as ‘basis’

Referring Cite

IRC § 408(o), IRC § 401(k), IRC § 403, Publication 590

Additional Helpful Information

  • Distributions of after-tax contributions are not subject to income tax or the early distribution penalty.
  • For any year that an individual makes nondeductible contributions he/she should file IRS Form 8606.
  • Form 8606 helps the individual to track the after tax/nondeductible amount so that it is not taxed when distributed from the traditional IRA.
  • Form 8606 must also be filed for any distributions that occur , beginning the year the after-tax/nondeductible amount is credited to the traditional IRA, until all the basis is distributed. This helps to determine the non-taxable portion of the distribution.
  • The basis recovery rule under IRC § 72(e)(8) provides for pro-rata distributions of pre-tax and post-tax amounts. Except for pre-1987 accrued balances, distributions from a plan, where the participant’s balance includes after-tax amounts, must include a pro-rated amount of pre-tax and post-tax balance. Where balances accrued pre-1987, the participant may choose to withdraw only the after-tax balance of that amount.

See Form 8606 for more information

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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