What are the tax implications of after-tax contributions in pensions?

When considering the tax implications of after-tax contributions in pensions, it's important to understand how these contributions affect the taxation of pension distributions. After-tax contributions are those made to a pension plan where the contributions have already been taxed as income. When these funds are eventually withdrawn, the taxation of these amounts can be quite nuanced.

After-tax contributions typically lead to a situation where only the earnings (the growth on the contributions) are subject to tax upon distribution. Because the principal amount contributed has already been taxed, it can be withdrawn tax-free. However, the earnings accumulated on those contributions are taxable during distribution. This differentiation means that there could be partial taxation upon distribution, where some parts of the pension amount withdrawn are taxed while others aren’t.

This understanding aligns well with answer choice B, as it acknowledges that while the after-tax contributions themselves are not taxed again upon withdrawal, the earnings that they generated within the pension plan are indeed subject to taxation. Therefore, any taxable amount from the pension distribution arises from the earnings on those after-tax contributions, leading to the partial taxation outcome described in choice B.