The Internal Revenue Service in late September issued long-awaited guidance on the allocation of after-tax amounts to rollovers, which answers what IRA guru Ed Slott said is one of the most common, if not the most common, question that he gets from advisors.

The question: “A lot of people have after-tax money in a 401(k) — they have pretax and after-tax money. When they take a distribution, can they take the after-tax money and convert to a Roth IRA tax-free?”

The IRS’ answer: Yes.

“This was an open question for years and years, and today it has been resolved,” Slott said in an interview on Sept. 18. “This only applies to distributions where there is after-tax money, effective today.”

The IRS guidance, Notice 2014-54, noted that these rules also apply to disbursements from 403(b) or 457 plans.

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.”