Allocating Pre- and Post-Tax Distributions, Multiple Destinations
When pre- and post-tax rollover distributions have multiple destinations, it can lead to complex tax issues. This situation is further explained below.
If a distribution on or after January 1, 2015 goes to multiple destinations (for example, part to a direct rollover and part to the employee who makes a rollover within 60 days), after-tax and pre-tax amounts may be assigned to each destination under rules set out in Notice 2014-54, describing proposed amendments to Reg § 1.402A-1. The following summarizes these rules:
Pre-Tax Amount Equals or Exceeds Distribution Amount that is directly rolled over to one or more eligible retirement plans: the pre-tax amount is assigned to the portion of the distribution that is directly rolled over, up to the amount of the direct rollover. Thus, each direct rollover consists entirely of pretax amounts.
Any Remaining Pre-Tax Amount: This amount is assigned to rollovers that aren’t direct rollovers (i.e., those done under the 60-day rollover rule), up to the amount of the 60-day rollovers.
Any Additional Remaining Pre-Tax Amount, if it is less than the amount rolled over in 60-day rollovers: the recipient can select how the pretax amount is allocated among the plans that receive 60-day rollovers.
Still More Remaining Pre-Tax Amount: That amount is includible in the distributee's gross income.
Example – partial direct rollover plus 60-day rollover: Clara participates in her employer’s qualified plan that does not contain a designated Roth account. Clara’s $250,000 account balance consists of $200,000 of pretax amounts and $50,000 of after-tax amounts. She separates from service and is entitled to, and requests, a distribution of $100,000. Under §72(e)(8), the pretax amount with respect to the distribution is $80,000 ($100,000 x $200,000/$250,000). Clara specifies that $70,000 is to be directly rolled over to her new employer’s qualified plan and that $30,000 is to be paid to her. Because the pretax amount exceeds the amount directly rolled over, the amount directly rolled over to the new plan consists entirely of pretax amounts. The amount paid to Clara (prior to application of withholding) consists of $10,000 in pretax amounts and $20,000 in after-tax amounts. Prior to the 60th day after the distribution, Clara chooses to roll over $12,000 to an IRA. Because the amount rolled over in the 60-day rollover exceeds the remaining pretax amounts, the amount rolled over to the IRA consists of $10,000 of pretax amounts and $2,000 of after-tax amounts.
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Example – direct rollovers to traditional and Roth IRAs: The facts are the same as in the prior example, except that Clara chooses to make a direct rollover of $80,000 to a traditional IRA and $20,000 to a Roth IRA. She is permitted to allocate the $80,000 that consists entirely of pretax amounts to the traditional IRA so that the $20,000 rolled over to the Roth IRA consists entirely of after-tax amounts.
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If the amount rolled over to an eligible retirement plan exceeds the portion of the pre-tax amount assigned or allocated to the plan, the excess is an after-tax amount.
Multiple 1099-Rs - According to Notice 2014-54, if one distribution results in multiple disbursements, each disbursement may be required to be reported on a separate Form 1099-R, in accordance with the instructions to Form 1099-R.