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Buc99 writes:

I would assume that the after tax monies are treated the way non-deductible contributions are. That is, you have a cost basis in the IRA in the amount of the after-tax monies. Withdrawals are then pro-rated and the part attributed to basis is not taxed again. This avoids penalty on these amounts, but since it is pro-rated, penalty is still possible on early withdrawals on the taxable portion. So, if you have a balance of 50,000 and the after-tax portion is 10,000, you would have a taxable (and potential penalty) amount of 80% of a withdrawal. Likewise, 20% would be tax and penalty free.

Your assumption is absolutely correct. When after-tax 401k contributions are transferred to a traditional IRA, they will be treated just like any other after-tax contribution to that IRA. That means part of any withdrawal is always taxed and part is not just as in the example you outlined.

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