New Single Distribution Rule for Retirement Plans

Beginning January 1, 2015, when participants choose to direct their retirement plan distribution to go to multiple destinations, the amounts will be treated as a single distribution for allocating pre-tax and after-tax basis (Notice 2014-54 and REG-105739-11). This will allow 401(a) qualified, 403(b) and 457(b) governmental retirement plan participants to:

• roll over amounts to both a Roth IRA and a non-Roth IRA,
• allocate the pre-tax amount of the distribution to the non-Roth IRA and the after-tax amount to the Roth IRA, and
• avoid having to pay income tax on pre-tax amounts rolled over to the non-Roth IRA.

Current separate distributions rule

Under current rules, each destination of a retirement plan distribution (for example, a distribution split between a direct rollover to an IRA and an actual distribution of funds) is considered a separate distribution. If a participant’s account balance contains both pre-tax and after-tax amounts, each distribution includes a pro rata share of both. A participant can’t choose to transfer the pre-tax amount to a traditional IRA and the after-tax amount to a Roth IRA.

Transition rules

The new single distribution allocation rules aren’t mandatory for plan distributions prior to January 2015. However, plan sponsors may apply this allocation rule to distributions made on or after September 18, 2014, and apply a reasonable interpretation of the allocation rules for distributions made prior to September 18.

Additional resources

• Rollovers of retirement plan and IRA distributions
• Rollover chart
• Individual Retirement Arrangements (IRAs)
• Types of retirement plans