The
law provides that if a participant’s account balance in a plan includes both
pretax and after-tax amounts, then distributions from the account generally are
considered to include a pro rata share of both pretax and after-tax
amounts. For example, if your account balance is $100,000, and consists
of $80,000 in pretax amounts and $20,000 in after-tax amounts, and you request
a distribution of $50,000, your distribution would consist of $40,000 of pretax
amounts and $10,000 of after-tax amounts.
Prior
to the issuance of Notice 2014-54, the IRS treated disbursements from a
retirement plan that were rolled over to multiple destinations as separate
distributions to each destination, with each distribution treated as containing
a pro rata portion of the pretax and after-tax amounts.. Notice 2014-54,
which was issued September 18, 2014, provides that all disbursements from a
retirement plan scheduled to be made at the same time are treated as a single
distribution even if they are sent to multiple destinations.
As
a result of this notice, taxpayers with pretax and after-tax amounts in their
plan, for example, can transfer through direct rollovers the pretax portion of
the distribution (including earnings on after-tax amounts) to a traditional IRA
and the after-tax portion of the distribution to a Roth IRA. (Previous
interpretations allowed accomplishing this result through 60-day rollovers but
not direct rollovers.) The guidance provided in Notice 2014-54 applies
only to distributions from qualified plans described in section 401(a) of the
Code (such as profit-sharing and 401(k) plans), section 403(b) plans and
section 457(b) governmental plans. The guidance in Notice 2014-54 is
generally effective January 1, 2015; however, transitional rules included in
the guidance permit taxpayers to utilize the new rules provided in the guidance
prior to the effective date.
The
guidance in Notice 2014-54 does not apply to distributions from
IRAs.
The
Service has received a number of questions following the issuance of Notice
2014-54. The following FAQs are provided to assist taxpayers in applying
the notice.
Can I roll over just the after-tax amounts in my account
to a Roth IRA and leave the remaining amounts in the plan (i.e., take a partial
distribution of just the after-tax amounts)?
No.
The guidance provided in Notice 2014-54 does not alter the requirement that
each distribution from a plan must include a proportional share of the pretax and
after-tax amounts in the account. Accordingly, any partial distribution
from the plan must include some of the pretax amounts you have in your account
-- you cannot take a distribution of only the after-tax amounts and leave the
pretax amounts in the plan. In order to roll over all of your after-tax
contributions to a Roth IRA, you could take a distribution of the full amount
(all pretax and after-tax amounts) in your account, roll over all the pretax
amounts in a direct rollover to a traditional IRA or another eligible
retirement plan, and roll over all the after-tax amounts in a direct rollover
to a Roth IRA.
I want to roll over my after-tax contributions to a Roth
IRA and roll over earnings on my after-tax contributions to a traditional IRA.
Can I do that?
Yes.
Earnings associated with after-tax contributions are pretax amounts in your
account. Thus, after-tax contributions can be rolled over to a Roth IRA
without also including earnings. Under the guidance, all pretax amounts
in a distribution may be rolled over to a traditional IRA and, in that case,
will not be included in income until distributed from the IRA.
Additional
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