On May 18, the IRS finalized a rule that will make it easier for retirement plan owners to transfer after-tax savings from a designated Roth account (DRA) to multiple destinations.
The final regulations eliminate the prior requirement that each disbursement from a DRA that is directly rolled over to an eligible retirement plan be treated as a separate distribution from any amount paid directly to the taxpayer. Under the previous rule, these amounts were separately subject to Internal Revenue Code Section 72(e)(2), which allocates pre-tax and after-tax amounts for each distribution.
Under the final rule, if disbursements are made from a taxpayer’s designated Roth account to both the taxpayer and the taxpayer’s Roth IRA or designated Roth account in a direct rollover, then pre-tax amounts will be allocated first to the direct rollover rather than allocated pro rata to each destination. The taxpayer will thus be able to direct the allocation of pre-tax and after-tax disbursement amounts to multiple destinations, applying the same allocation rules that apply to distributions from other types of accounts. This minimizes the amount that would be taxable if the portion not rolled over was not a qualified distribution, or a distribution that is made at least five years after the year of the first designated Roth contribution and after the taxpayer has turned age 59.5 or has become disabled.
Prior regulations had provided that any amount paid in a direct rollover is treated as a separate distribution from any amount paid directly to the taxpayer. Under the new regulation, the separate distribution requirement would not apply to distributions made on or after January 1, 2016; or, if the taxpayer chooses, on or after Sept. 18, 2014. Taxpayers are referred to Notice 2014-54, which was issued at the same time as the proposed regulations, for the detailed rules on allocating pre-tax and after-tax amounts for distributions to multiple destinations.