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New Retirement Distribution Rules for 2015

The IRS has modified the rule regarding retirement plan rollovers to multiple qualified destinations. The previous rule (which is in effect until December 31, 2014) considered each destination from a retirement plan distribution to be a separate distribution. This meant that if you had both pre-tax and post-tax contributions in your retirement plan, you were not able to simply move the pre-tax contributions to a traditional IRA and the post-tax contributions to a Roth IRA, without being taxed.


For example, let’s say you had $10,000 in a retirement account, which consisted of $6,000 in pre-tax distributions and $4,000 in post-tax distributions. If you wanted to move the pre-tax distributions to a traditional IRA, the rollover would consist of $3,600 of pre-tax contributions and  $2,400 of post-tax distributions (nothing in this rollover is taxed). However, if you wanted to move the post-tax distributions to a Roth IRA, the rollover would consist of $2,400 of pre-tax contributions and $1,600 of post-tax contributions (taxed on the pre-tax contributions).


If the above scenario occurred in 2015, you would be able to roll over the pre-tax contributions to a traditional IRA and the post-tax contributions to a Roth IRA, without paying tax on either. However, there are two clarifications that come with the rule change:

  1. If a taxpayer has pre-tax and post-tax contributions in a retirement account, the IRS will not allow the taxpayer to roll over the post-tax amount alone.
  2. Taxpayers may roll over post-tax contributions to a Roth IRA and roll over the earnings from those contributions to a traditional IRA


 

 
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