On May 17, 2016, the United States Treasury Department and the Internal Revenue Service (IRS) issued final regulations (T.D. 9769)1 that modify rules on the tax treatment of disbursements from designated Roth accounts to multiple destinations.
These final regulations eliminate the “separate distribution rule,” which required a plan participant to treat each disbursement from a designated Roth account that is directly rolled over to an eligible retirement plan as a separate distribution from any amount paid directly to the participant. Whereas the “separate distribution rule” allocated pre-tax and after-tax amounts pro rata to each separate destination, the final regulations allocate pre-tax amounts first to the direct rollover. This change should enable retirement plan participants to more easily transfer after-tax savings from their retirement plans to Roth individual accounts.
The final regulations are substantively similar to rules provided in proposed regulations and related IRS Notice 2014-552 in that they eliminate the “separate distribution rule.” For all distributions made on or after January 1, 2016,3 taxpayers may direct after-tax and pre-tax amounts that are simultaneously disbursed to multiple destinations, applying the same allocation rules to distributions from designated Roth accounts that apply to distributions from other types of accounts.
The final regulations also provide a transition rule for distributions made prior to January 1, 2016, which preserves the separate distribution rule for any distributions made on or after September 18, 2014, unless a taxpayer elects to follow the allocation rules applicable to distributions made on or after January 1, 2016.
The final regulations became effective upon publication in the Federal Register on May 18, 2016.4
For a related story in KPMG’s TaxNewsFlash-United States “Final regulations: Disbursements from designated Roth accounts to multiple destinations,” (May 17, 2016), click, here.
The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.
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