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Chapter 6. Saving Pre-Tax or After-Tax—D... > Pennywise and Dollar-Foolish! - Pg. 68

Saving Pre-Tax or After-Tax--Does It Really Matter? 68 For What It's Worth Thanks to EGTRRA, beginning in 2002 you can roll over your after-tax contributions to an IRA or another employer's plan. Prior to 2002, after-tax contributions could not be rolled. Remember that these rollovers must be accomplished through a trustee-to-trustee transfer (i.e., you can't control the money when it's distributed). Make sure you track your "already-been taxed" contributions from your "never-been taxed" contributions and earnings. Use IRS Form 8606 for this chore. If you don't track, the IRS could fine you and tax your already taxed money. The problem comes from the "investment earnings" on this money. The IRS says when you withdraw a dollar of your after-tax contributions, a portion of the money you get back is really investment earnings. As a result, you'll get hit with 20 percent withholding (unless it's a hardship withdrawal) and a 10 percent penalty tax on the earnings portion only. How do you get around the 20 percent and 10 percent? The answer is simple (but only because you read this book). When you apply for your after-tax withdrawal, make certain you instruct the Record keeper (that's the umpire) to "roll over" the investment earnings portion to an IRA. You do have an IRA, don't you? Tell the Record keeper you want a Trustee-to-Trustee transfer of this money. (See Chapters 9, "IRAs Versus 401[k]s --Which Is Better?" and 19, "Roll, Roll, Roll It Over," for details on IRAs and rollovers.)