Nelson just retired from his place of employment at full retirement age (age 66). Over his years of employment, Nelson contributed a total of $60,000 to his pre-tax thrift savings plan and $40,000 to his after-tax thrift savings plan. The employer matched a portion of his deferrals; those matching dollars amounted to a total of $15,000. Today the combined accounts are now worth $200,000 (after compound earnings). If Nelson was to withdrawal $20,000 in his first year of retirement, what is the tax consequence?
$8,000 will be subject to ordinary income tax
$10,000 will be subject to ordinary income tax
None of the $10,000 will be subject to ordinary income tax because all withdrawals will be considered return of basis (principal) first. Once the $40,000 is recovered, then all subsequent withdrawals will be subject to ordinary income tax
$2,000 will be subject to ordinary income tax