August 3, 2016

Final Treasury Regulations on Allocation of Taxable Amounts Between Multiple Rollovers From Roth 401(k) and 403(b) Accounts

The Department of the Treasury (Treasury) issued final regulations that allow taxpayers to avoid immediate taxation on a portion of a distribution from a Roth 401(k) or 403(b) account. The regulations provide that if a taxpayer rolls over one portion of a Roth distribution to another Roth 401(k), Roth 403(b) or Roth IRA, and receives another portion directly, taxable amounts (essentially earnings) are allocated first to the rolled-over piece (meaning that it continues to not be taxed). The distribution that the participant receives is also not taxed if it consists solely of Roth after-tax contributions. The regulations eliminate a prior requirement that there be a pro-rata allocation of the taxable amount. The final regulations apply only to distributions made on or after January 1, 2016, but taxpayers may elect to apply the similar temporary rules of Notice 2014-54 for any distributions made on or after September 18, 2014.

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