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:
- 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.
- 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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