3999 / Can a taxpayer rollover pre-tax and after-tax contributions in a qualified plan into separate accounts in a single distribution?
Notice 2014-54 allows a distribution from an employer-sponsored retirement account to be treated as a single distribution even if it contains both pre-tax and after-tax contributions, and even if those contributions are rolled over into separate accounts, so long as the amounts are scheduled to be distributed at the same time. The guidance now allows the taxpayer to allocate pre-tax and after-tax contributions among different types of accounts in order to maximize their future earnings potential—avoiding the pro-rata tax treatment discussed below.
This creates a planning opportunity for higher income taxpayers who have sufficient funds so that they are able to make contributions in excess of the pre-tax limit ($24,500 in 2026). If the specific plan allows for after-tax contributions, these taxpayers can contribute after-tax dollars with the knowledge that those funds can be separated and rolled directly into a Roth upon exiting the employer-sponsored plan, without additional tax liability.
The new rules became effective for transactions scheduled to occur on or after January 1, 2015, but the IRS guidance allowed clients to rely on the rules as of their release on September 18, 2014.1
Prior regulations permitted a distribution to be rolled partly into a traditional account and partly into a Roth, but the taxpayer was required to treat the distribution as two separate distributions—meaning that the distribution to each account would be treated as coming partly from pre-tax contributions and partly from after-tax contributions.
So, for example, if the taxpayer's distribution of $100,000 consisted of $80,000 in pre-tax contributions and $20,000 in after-tax contributions, the taxpayer could direct that $80,000 be transferred to a traditional IRA and $20,000 to a Roth. However, the amount transferred to each account would be pro-rated (80 percent-20 percent) so that 80 percent of the Roth transfer would be taxed.
1. Notice 2014-54, 2014-41 IRB 670.