Taxpayers who make after-tax contributions to a qualified employer plan recover their investment (cost) when they begin to take periodic payments. How is their investment recovered?

The after-tax portion is recovered first.

The after-tax portion is recovered last.

Part of each year's distribution is taxable and part is recovery of cost until all the cost is recovered.

Each year's distribution is multiplied by a fixed percentage to determine the taxable amount and the cost recovery of each distribution.