ROLLOVERS OF AFTER-TAX CONTRIBUTIONS IN RETIREMENT PLANS
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.