IRS Provides More Clarity on New Rollover Rule

Internal Revenue Service (IRS) Notice 2014-54 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, taxpayers with pre-tax and after-tax amounts in their plan, for example, can transfer through direct rollovers the pre-tax 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. Previously, transferring after-tax portions to a Roth IRA could only be accomplished through 60-day rollovers but not direct rollovers.

The IRS has received questions following the issuance of Notice 2014-54, and recently announced answers to those questions.

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 pre-tax and after-tax amounts in the account. Accordingly, any partial distribution from the plan must include some of the pre-tax amounts you have in your account—you cannot take a distribution of only the after-tax amounts and leave the pre-tax 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 pre-tax and after-tax amounts) in your account, roll over all the pre-tax 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 pre-tax amounts in your account. Thus, after-tax contributions can be rolled over to a Roth IRA without also including earnings. Under the guidance, all pre-tax 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 information about the new rollover rules is available here.