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.