New Q&As explain single distribution rule for retirement plans
Beginning Jan. 1, 2015, when qualified plan participants choose to direct their retirement plan distribution to be rolled over to multiple destinations at the same time, the amounts will be treated as a single distribution for allocating pre-tax and after-tax basis
What this means for you is if you are a Code Sec. 401(k) , Code Sec. 403(b) , or Code Sec. 457(b) retirement plan participant, you may now make a single distribution which:
• rolls over amounts to both a Roth IRA and a non-Roth IRA;
• allocates the pre-tax amount of the distribution to the non-Roth IRA and the after-tax amount to the Roth IRA, and
• avoids having to pay income tax on pre-tax amounts rolled over to the non-Roth IRA.
Rollovers of just after-tax plan amounts aren't allowed. The IRS says that a taxpayer can't roll over just the after-tax amounts in a plan to a Roth IRA and leave the remaining amounts in the plan. In other words, a partial distribution of just after-tax amounts is not permitted.
Taxpayers may roll over after-tax contributions to a Roth IRA and roll over earnings on those contributions to a traditional IRA. The IRS says earnings associated with after-tax contributions are pre-tax amounts in a plan account. Thus, after-tax contributions can be rolled over to a Roth IRA without also including earnings. 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.
This change in the rules does not alter the requirement that each distribution from a plan must include a proportional share of the pre-tax and after-tax amounts in the plan participant's account. As a result, any partial distribution from the plan must include some of the pretax amounts in the account-the taxpayer cannot take a distribution of only the after-tax amounts and leave the pre-tax amounts in the plan.
For more information, please contact Gosule, Butkus & Jesson, LLP.
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