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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76238  
Subject: Re: Need claification Date: 3/29/2002 1:03 PM
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CABob asks:

Does that mean the funds would be taxed twice, once when it goes into the 401k and then again when it comes out of the IRA? Or when it comes out is it separately identified so that taxes are not due. If the latter (which I hope is the case) can one choose which money is comming out or does it come out in the appropriate ratio or by some set formula?

It will not be taxed again when you start withdrawals from the IRA. Instead, a pro rata portion of every IRA withdrawal will come to you tax-free based on those after-tax contributions, and the rest of the withdrawal will be taxed. Basically, if you start withdrawals when you have $1,000 of previously taxed money in an IRA worth $10,000 when you start withdrawals, then 10% (or $1,000 divided by $10,000) of the withdrawal will be untaxed. So, if you took $1,000, then $900 would be taxed and $100 wouldn't be taxed. Next year you would only have $900 of untaxed money left, so that becomes the numerator and the next year's market value becomes the denominator to compute that year's untaxed part of the withdrawal. You will find the procedures for this method described in IRS Publication 590 (Individual Retirement Arrangements) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html. All withdrawals and the computation would be reported on Form 8606 that you must file with the income tax return for the year of the withdrawal.

Regards..Pixy
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