When do taxpayers recover their after-tax contributions to a qualified employer plan?

Taxpayers recover their after-tax contributions to a qualified employer plan gradually, with a portion being recovered each year until the total after-tax contributions have been fully recovered. This process occurs because the after-tax contributions do not get taxed again when distributions are taken from the retirement account. Therefore, the cost basis—the total amount of after-tax contributions made—is returned to the taxpayer over time as they withdraw funds from the plan.

Understanding this mechanism is crucial for taxpayers to accurately report their taxable income when they begin to receive distributions. Since the after-tax contributions are not subject to tax upon distribution, the return of those contributions needs to be tracked carefully to ensure proper tax treatment of any earnings and to avoid double taxation.

The other choices suggest different mechanisms for recovering these contributions, but they do not align with the established tax rules governing qualified employer plans.