IRS Drops Allocation Rule for Disbursements From Designated Roths to Multiple Destinations
The IRS has published final regulations regarding disbursements from a designated Roth account that is directly rolled over to an eligible retirement plan.
Specifically, the IRS has removed the requirement
that each disbursement from a designated Roth IRA that is directly rolled over to an eligible retirement plan be treated as a separate distribution from any amount directly paid to the employee.
As a result of this change, if disbursements are made from a taxpayer’s designated Roth account to the taxpayer and also to the taxpayer’s Roth IRA or designated Roth account in a direct rollover, then pretax amounts will be allocated first to the direct rollover, rather than being allocated pro rata to each destination.
Also, the IRS notes that a taxpayer will be able to direct the allocation of pretax and after-tax amounts that are included in disbursements from a designated Roth account that are directly rolled over to multiple destinations, applying the same allocation rules to distributions from designated Roth accounts that apply to distributions from other types of accounts. These regulations affect participants in, beneficiaries of, employers maintaining, and administrators of designated Roth accounts under tax-favored retirement plans.
The IRS says it received no comments regarding the proposed regulations, so this constitutes a finalization of the proposed regulations, with a one-year delay of applicability — from Jan. 1, 2015, to Jan. 1, 2016.