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New Allocation Rules for Roth IRA Rollovers

(posted: May 19th, 2016)


The IRS finalized a taxpayer-friendly rule eliminating the requirement that each disbursement from a designated Roth account that is directly rolled over to an eligible retirement plan be treated as a separate distribution from any amount paid directly to the employee.

The former rule meant that these amounts were separately subject to Sec. 72(e)(2), which allocates pretax and after-tax amounts for each distribution.

Under the new rules, all disbursements of benefits from the plan to the recipient that are scheduled to be made at the same time are treated as a single distribution regardless of whether the recipient has directed them to be made to a single destination or multiple destinations.

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 pretax amounts are now allocated first to the direct rollover, rather than being allocated pro rata to each destination. Also, a taxpayer can direct the allocation of pretax and after-tax amounts that are included in disbursements from a designated Roth account that are directly rolled over to multiple destinations, applying the same allocation rules that apply to distributions from other types of accounts.

If the pretax amount of the aggregated disbursements that are treated as a single distribution is less than the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the entire pretax amount is assigned to the amount of the distribution that is directly rolled over.

A transition rule to the effective date permits taxpayers choosing not to apply the separate distribution rule during the transition period (on or after Sept 18, 2014, and before Jan. 1, 2016) to reasonably interpret the last sentence in Sec. 402(c)(2) (generally requiring that pretax amounts be treated as rolled over first) to allocate pretax and after-tax amounts among disbursements made to multiple destinations.

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