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Yo, pauliboy.

<<Re: Form 8606. I guess leaving the money in the funds is the best approach because it allows me to invest about $17,000 annually; the 401k is not assessed for fed. income tax, and the 14% dap is money given to me above my salary.

Does this mean that any account set up post tax will be taxable every year for any gains made in the fund through the sale of stock? If I elect to use Form8606 how does this reduce tax on the fund? I thought that any initial investment is not taxable by definition; only gains are taxed and losses become a deduction.>>

I hope when you say you're investing $17K annually in the 401k that you mean coounting your contribution AND that of your employer's, you're investing that much annually. The amount that comes out of your pocket can't exceed a maximum dollar limit of $9,500 this year.

I also hope when you say you'll be leaving your money in the 401k that you mean you will continue making your contributions there. You can't get at that money normally until you quit, retire or die. Thus, you have but little choice BUT to leave it there until one of those events occurs.

As to taxability of accounts outside the 401k, I think there's a little confusion in understanding. The money you net after taxes from your employer can be invested anywhere. If you investment it in an ordinary account, it's true you'll only be taxed on the gains. Additionally, you can use your losses to offset those gains. But in an IRA, there is no such thing as long term capital gain or loss except in very rare circumstances, and I've only seen those discussed in theory.. Everything is treated as ordinary income when it's finally withdrawn from the IRA. With an IRA established with non-deductible contributions (i.e., one you set up with after-tax dollars), you can contribute up to $2K each year. The earnings accumulate tax deferred until you begin withdrawing money from the IRA. At that time, part of the money comes back to you untaxed, and the rest gets taxed at ordinary income tax rates. The untaxed part represents the contributions you made from after-tax wages through the years (and reported via Form 8606), and the taxable part represents the earnings that accumulated untaxed during that time. Form 8606 helps you and the IRS keep track of the after-tax money that shouldn't be taxed again when it comes back out of the IRA. See IRS Pub 590 (Individual Retirement Arrangements) for details.

Hope that clears things up a bit.

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