IRS Releases Guidance on Roth After-Tax Issues

The notice stated: "The applicability date of the regulations is proposed to be Jan. 1, 2015. However, in accordance with § 7805(b)(7), taxpayers are permitted to apply the proposed regulations to distributions made before the applicability date, so long as such earlier distributions are made on or after Sept. 18, 2014."

Slott gave the following example: Say you have $100,000 in a 401(k) — $80,000 is pretax and $20,000 is after tax. If you are taking a distribution of $100,000, now you can take that $20,000 out and convert it to a Roth IRA tax free. The $80,000 can go to an IRA as a tax-free rollover, but it will eventually be taxed when it comes out.

Said Slott: "The first thing advisors should do [is] to make sure they know all of their clients who have after-tax money in a 401(k)."

Advisors, he said, will have to do "some hand-holding" and explain the rules to clients, as well as coordinating with their clients' company plans.

Slott said advisors "will want to make sure the proper allocation of the 401(k) plan distribution to pre- and post-tax funds are reported correctly to the plan so that they report it correctly to the IRS for the 1099-R that the client will receive."