Question about IRS Notice 2014-54

Submitted by Gregg Su on Fri, 2014-11-07 09:25

My employer provides a 401k that allows me to contribute a combination of pre-tax, after-tax, and Roth dollar. The maximum annual contribution limit to the plan for 2014 is $51,000 which must include no more than $17,500 pre-tax and/or Roth dollar. I have contributed fully to this amount ($51,000 with $17,500 as Roth dollar). My goal is to convert as much of it as possible to Roth so that it may grow tax free and I don’t have to worry about RMD in the future.

Recently, I read an article on IRS Notice 2014-54 permitting after-tax contribution and its corresponding pre-tax earning to be distributed directly to a Roth IRA. Is this true? My copy allows in-service distribution. May I take the in-service distribution and roll it over to my Roth IRA (the Roth IRA resides at a separate banking institution) or do I have to wait until I leave the company to do so.

Lastly, I am rather curious, the in-service distribution will also allow me to distribute after-tax dollar, not the Roth dollar. Why is that?



Submitted by Alan - IRA critic on Fri, 2014-11-07 16:30

  • The 17,500 limit applies to elective deferrals. You can elect any combination between pre tax and designated Roth to apply to this limit. These amounts can never be distributed before 59.5 or separation from service (except hardship distributions). Some plans may allow you to distribute company matching at some point. However, after tax contributions are different and are allowed to be treated as a separate contract along with their earnings. This is also referred to as a separate sub account, which means the same as a separate contract. This portion can usually be distributed nearly any time, but plans may limit the number of distributions per year.
  • Notice 2014-54 allows you to select the destination account for permitted rollovers. Therefore, you could select that your after tax contributions be directly rolled to your Roth IRA and the earnings to your TIRA. There would be no current tax due. Of course, if the earnings were very small because you did the rollovers soon after your contributions, you could also direct the entire balance to your Roth IRA and pay taxes on the small amount of earnings included.

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