The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9769) finalizing the rules for disbursements from a designated “Roth account” that is directly rolled over to qualified plans established under section 401(a), section 403(b), or section 457(b).
Today’s final regulations [PDF 197 KB] eliminate 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 and, therefore, separately subject to the rule in section 72(e)(2) allocating pretax and after-tax amounts to each distribution.
As a result of this change, if disbursements are made from a taxpayer’s designated Roth account to the taxpayer and also to the taxpayer’s Roth IRA or designated Roth account in a direct rollover, then pretax amounts will be allocated first to the direct rollover, rather than being allocated pro rata to each destination. Also, a taxpayer will be able to 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 to distributions from designated Roth accounts that apply to distributions from other types of accounts.
This release finalizes rules provided in proposed regulations (September 2014) and rules reflected in related IRS guidance (Notice 2014-54). In general, the 2014 guidance provided that all disbursements of benefits from a plan to the recipient, scheduled to be made at the same time (disregarding differences due to reasonable delays to facilitate plan administration) are to be treated as a single distribution—without regard to whether the recipient has directed that the disbursements be made to a single destination or multiple destinations.
According to the preamble to today’s final regulations, today’s regulations finalize the 2014 proposed regulations, but with a one-year delay of the applicability date—effective January 1, 2016 (instead of January 1, 2015). The preamble states that these final regulations “…are substantively the same as the proposed regulations, but express the rule differently to better reflect the ongoing rule and the transition rule.”
Under the final regulations:
The final regulations apply to distributions from designated Roth accounts made on or after January 1, 2016, and for such distributions taxpayers are required to follow the allocation rules described in Notice 2014-54.
The final regulations also preserve the separate distribution rule for distributions made prior to the January 1, 2016 applicability date—except that a taxpayer is permitted to choose not to apply the separate distribution rule to distributions that are made on or after September 18, 2014, and before January 1, 2016. The preamble explains that taxpayers choosing not to apply the separate distribution rule to distributions made during that transition period, must apply a reasonable interpretation of the last sentence of section 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. For this purpose, a reasonable interpretation of the last sentence of section 402(c)(2) includes the rules described in Notice 2014-54.
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