Is a cost basis on an after tax 401K the money I owe tax on?

Question

I make after tax contributions to my company 401K. 15 years ago my company didn't offer a ROTH 401K but allowed for after tax contributions. My contributions are 8% of my base pay (after tax) and my company matches 4% of pre-tax dollars. All interest and reinvested dividends are also pre-tax. My company has switched investment managers and now there is a ROTH 401K option. If I want to change my 401K to a ROTH 401K, is the cost basis, the money I owe tax on?

Answer 1

Because you invested after-tax dollars, you don't owe tax on those dollars a second time. The cost basis is the amount you put in. Therefore, you would owe tax on everything except the cost basis.

If your plan allows it, it is obviously to your benefit to convert all your after-tax balance over to Roth, so that future gains will be tax-free unlike your previous plan. Whether you should also convert some of the tax-deferred balance (gains and match), paying tax in the process, is a much more complicated question.