Forrestall CPAs, LLC
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[BenefitsLink.com editor's note: This is a copy of an email sent to practitioners on December 24. It has not been posted to the IRS web site, so we have created this web page using the text and format of the email. Some links are not working.]
Employee Plans News
Dec. 23, 2014
Information for Benefits Practitioner
Information for Plan Participant/Employee
Information for Plan Sponsor/Employer
Correcting Plan Errors
Compliance & Enforcement
Contact My Local Office
Forms & Pubs
Frequently Asked Questions
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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.
If you have a technical or procedural question relating to retirement plans, please visit the EP Customer Account Services page in the Retirement section of the IRS.gov Web site.
If you have a specific concern about your retirement plan, call EP CUSTOMER ACCOUNT SERVICES at 1-877-829-5500.