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@covert-eric Can you clarify what type of plan it is? (employer 401k, annuity, etc) Thanks!
401k from employer. I've never seen an explanation makes sense.
Cost basis represents the amount of your investment - it is money that you already paid tax on so it is not taxed again when you take the money out of the account. You will only be taxed on the earnings. It would apply to traditional IRAs and annuities. You will have a cost basis in your traditional IRA if you made any nondeductible contributions.
In contrast, you would put after tax money into a Roth IRA. Since it is after tax dollars, you do not pay any tax when you take contributions out of a Roth, and if it is a qualified distribution, you do not pay tax on the earnings so you can grow your retirement account and not have to pay tax on it.
Employer sponsored plans are treated a bit differently- they are considered deferred compensation. It is payment for working that you choose to set aside in the retirement account now so you will pay the tax on it later. If you look at your W2, your 401k contributions (which you should be able to see in Box 12) are not included in Box 1 for Income Tax. This amount is added to Box 3 and 5 so you do pay the FICA tax on it now.
401k contributions are deducted from your pay before tax so they are always "pre-tax" so they do not count as basis. Note that you may be able to contribute to a Roth401k where the contributions are taxed (included in Box 1) but you get the advantage of tax free income on the growth.
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