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A friend of mine at work and I were discussing 401k options the other day. We were also commenting on how difficult it is to track all the 'different money' in our 401k's. For example, our accounts are broken into Employer Old Money, Employer New Money, Employee Old Before-Tax Money, Employee Old After-Tax Money, Employee New Before-Tax Money, and Employee Old Before-Tax Money. Don't bother asking why some of it is After-Tax money, it was something I did when I was younger and didn't really understand why.

Anyway, the question that befuddled us was one of accounting at the end of the life of the 401k. It's not one I've bothered with before as it's still a long way off. Are capital gains and dividends accounted for for each of the many investments you may have had for however brief a time throughout the life of the 401k? Or is there a simpler accounting method using just 'pools' of money?

Except for after-tax contributions, everything that comes out of the 401(k) is ordinary income, so tracking capital gains and losses isn't required. Vesting requirements may require the separate tracking of some employer contributions, but again, it doesn't really matter in the end.

How your money is tracked depends on what it's invested in. If it's mutual funds, you should have shares of the funds, and regardless of how they're tracked while you're working, they all get lumped together to determine total value.

Phil Marti
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