They permit allocation of earnings to disbursements from designated Roth accounts to multiple destinations.
Some
participants in 401(k) plans made nondeductible after-tax contributions
to their accounts. Upon retirement, they wanted to segregate the
after-tax portion of their benefits from the pre-tax portion, so they
could roll the pre-tax portion into a traditional individual retirement
account and the after-tax portion into a Roth IRA.
In
Notice 2009-68, the Internal Revenue Service said that if all of the
funds are rolled over, the basis would be allocated pro rata, so that a
portion of the amount rolled into the Roth IRA would be a taxable
conversion.
Taxpayers
discovered a workaround. They would take a lump-sum distribution and
deposit it into a taxable account. Then they would roll the pre-tax
amount to a traditional IRA, leaving the after-tax portion behind.
Finally, they would roll the after-tax amount into a Roth IRA. All of
this had to be completed within 60 days of receipt of the distribution.
In Notice 2014-64, the IRS reconsidered its position and allowed participants to select how the pre-tax amount is to be allocated among multiple destinations.
Proposed Regulations
The
IRS issued the regulations in final form effective May 18, 2016 (T.D.
9769). Under the final regulations, a participant may allocate the
earnings to the portion rolled over into another designated Roth account
or Roth IRA, thus minimizing the amount that would be taxable if the
portion not rolled over isn’t a qualified distribution. The participant
may also allocate the earnings in the case of rollovers to multiple
destinations, such as another designated Roth account and a Roth IRA.
______________________________________________________________________________________
For help with your legal needs contact a business, tax, and health care law attorney at the offices of AttorneyBritt.
Review-Like-Follow AttorneyBritt On: