Recent IRS Guidance on Roth Rollovers Lifts Long-Standing Ambiguity, Practitioners Say


Recently released IRS guidance on rollovers of after-tax money to Roth individual retirement accounts cleared up ambiguity that had existed for years, practitioners said.         

The guidance in proposed rules (REG-105739-11, RIN 1545-BK08) and accompanying guidance in Notice 2014–54 clarified that plan participants can transfer after-tax savings from their retirement plans to Roth IRAs.         

“The ruling is great, it's what people thought it was. When you get a distribution you can really direct your money any way you want and most people want to direct it to have a tax-free result. So it confirms that you can take your after-tax money and put it in your pocket, or put it into a Roth IRA,” said Elizabeth T. Dold, a principal at Groom Law Group Chartered in Washington.                  

The Internal Revenue Service issued the guidance Sept. 18.           

The IRS also gave guidance on sending retirement plan distributions to multiple destinations, something that hadn't been clear in the past, said Kathryn L. Ricard, senior vice president for retirement policy at the ERISA Industry Committee in Washington.         

“That's why this guidance was so helpful, so necessary, to literally talk about how everything from principal and interest would be apportioned, or divided between all the accounts,” she said.         

Nancy S. Gerrie, partner at McDermott Will & Emery LLP in Chicago, said that the guidance was a pleasant surprise, particularly because it was so favorable for taxpayers.         

“It gives plan participants more flexibility in handling amounts that come out of their plans and allows them to direct where they want their distributions to go, so one of the options is to rollover after-tax money into a Roth IRA,” Gerrie said.         

‘Gray Area.'         

Ed Slott, an IRA adviser with Ed Slott & Co. LLC said prior to the guidance there were  questions regarding the conversion of after-tax money distributions from a retirement account to a Roth IRA.         

“It started with the Pension Protection Act of 2006, the provision allowing direct Roth conversions from plans kicked in in 2008 then the IRS released Notice 2008-30 that started some of the ambiguity which made us believe maybe you could convert the after-tax money to a Roth IRA tax-free, but we weren't sure,” Slott said.         

Notice 2008–30 provided guidance in the form of questions and answers on certain retirement plan distribution-related provisions of the PPA that became effective in 2008, including guidance on rollovers from eligible retirement plans to Roth IRAs.         

The following year, the IRS issued Notice 2009–68, which Slott said seemed to imply that rollovers couldn't be made to Roth IRAs, leaving “more of a gray area”.         

“Now we have Notice 2014-54, so five years later, actually since the PPA provision came about, its almost eight years later, and now we have guidance that says, ‘Absolutely yes, the after-tax money can go to a Roth IRA,' ” he said. 

Excerpted from a story that ran in Pension & Benefits Daily (10/3/14).