What is the significance of understanding the cost basis for 401(k) investments?

Understanding the cost basis for 401(k) investments is crucial for calculating capital gains or losses when these investments are sold or distributed. The cost basis represents the original value of an investment, which forms the foundation for determining the profit or loss on that investment when it is eventually sold. This is particularly important for tax purposes, as capital gains are taxed on any appreciation in value over the cost basis. When a participant withdraws funds from their 401(k) or converts their investments to cash, knowing the cost basis helps assess the taxable amount and ensures accurate tax reporting.

The other options focus on different aspects of 401(k) management and do not directly relate to the concept of cost basis. For instance, determining eligibility for loans pertains to plan provisions, while employer matching contributions are tied to the employer’s contribution rules. Understanding retirement age requirements relates to distribution rules and penalties, rather than the specifics of cost basis.