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My first 401(k) started in the early 1990s with some employer matching funds. Since then, there have rollovers, more 401(k)s, and lost records. Aside from a really rough estimate, what happens when the 401(k) cost basis is unknown?

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    What about Pennsylvania ? fool.com/knowledge-center/… Pennsylvania typically doesn't allow you to exclude your 401(k) contributions from your state taxable income in the year you make them – Neil Apr 25 at 18:11
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Unless you made after tax contributions your basis is zero and all distributions are taxable income. If the cost basis is unknown it would be treated as if it were zero. Relatively few 401(k) plans allow after tax contributions and its likely that you would know if you had made them.

I’m referring to after tax contributions to a traditional 401(k) plan not designated Roth contributions. After tax contributions are allowed and would mean the earnings on those contributions would be taxable as ordinary income when withdrawn but the original contribution would not be.

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    After tax contributions can be rolled into a Roth IRA when you switch jobs or retire. – Nathan L Apr 24 at 15:04
  • @NathanL Yes, or when withdrawn as an in-service withdrawal if the plan allows those as well, but that wasn't what the question was about so I didn't mention that. Also certain merger/buyout situations can trigger the ability to rollover 401(k) balances. – T. M. Apr 24 at 19:05
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Cost basis doesn't matter because all distributions are:

  • taxable in traditional retirement accounts.
  • non-taxable in roth accounts.

Contributions are relevant to roth accounts because you can take those back within certain parameters without any penalty.

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    That’s not true if there were after tax contributions. – T. M. Apr 24 at 8:05
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    @T.M. I don't understand your comment here. After-tax contributions to a 401(k) are usually to a Roth 401(k) are you referring to something else? – Nathan L Apr 24 at 14:21
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    @NathanL: Yes, there's a third type of 401(k) which is an after-tax (contributions beyond the now-19k annual limit). – Ben Voigt Apr 24 at 14:38
  • @BenVoigt wouldn't most people just roll those to a Roth IRA when they retire or switch jobs? – Nathan L Apr 24 at 14:47
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    @NathanL: Mostly correct. The cost basis matters at the moment of rollover because it determines how much of the after-tax account rolls to traditional IRA and how much to Roth IRA. – Ben Voigt Apr 24 at 15:19
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A 401(k) plan is a qualified retirement plan. This means that as long as you follow all the rules and only roll funds to other qualified retirement plans, you don't need to worry about the cost basis of any purchases, because you won't pay any taxes on any of the investments (capital gains, etc.) while your money remains in those qualified plans.

As quid mentioned earlier, you will only pay taxes (depending on the type of plan) when the funds are withdrawn, not when individual investments are bought or sold. (Nor when dividends are paid.)

The special rules that you want to pay attention to with these qualified plans are related to contribution limits, rollovers, and especially withdrawals. Those rules are amply covered in other answers here, but you should become familiar with the advantages and disadvantages of each type of plan.

  • "As quid mentioned earlier, you will only pay taxes (depending on the type of plan) when the funds are withdrawn" - and do you need the cost basis at that time, or is it not used in the calculation? – Don Branson Apr 24 at 20:46
  • @DonBranson cost basis is the wrong term here, but generally no. If it's in a traditional account (pre-tax contributions) then you will pay tax when you withdraw because that's money you were never taxed on. In Roth accounts, you paid in post-tax, and the original contributions are available in a variety of circumstances, and the gains are available tax free at retirement time. – Nathan L Apr 24 at 20:56

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