In Y2017, how do we implement IRS notice 2014-54 to re-characterize to a ROTH IRA an After Tax Distribution that was made in Y2010 from a 401K to a Traditional IRA?

[wadhwa]

Originally in Y2009, After Tax Distribution was rolled to a ROTH IRA, but in Y2010 it was recharacterized to a Traditional IRA as IRS rules did not allow it then. Following IRS Notice 2014-54, one can revert it back to ROTH IRA. Question is how to do it in Y2017? What Distribution Code should be on the 1099R so that the rollover is not taxed?

[dmertz]

Notice 2014-54 only applies to distributions from qualified retirement plans like your 401(k) , not to distributions from IRAs.  Any distribution from your IRA will be a pro-rata distribution of taxable and nontaxable amounts in the proportion that the after-tax money (now treated as contribution basis in your IRAs) makes to the overall balance in your IRAs and is calculated on Form 8606.  You're after-tax basis from the 401(k) is entered into TurboTax by indicating, Yes, you made nondeductible contributions to your traditional IRAs, then clicking the EasyGuide button and indicating that you rolled over after-tax money from an employer plan.  TurboTax will then ask you to provide an explanation statement for this adjustment to your traditional IRA contribution basis that goes on Form 8606 line 2.

The only way to isolate basis in your IRAs would be to roll the pre-tax portion to a qualified retirement plan that will accept such a rollover.  Rollovers from an IRA to a qualified retirement plan are deemed to first come from the taxable money.

[wadhwa]

Hi dmertz, Notice 2014-54 transition rules towards the end of the notice indicate that the notice applies to distributions prior to the notice date. In Y2009 entire pretax and entire after tax amounts in my 401k were rolled over with pretax amount going to a traditional IRA and after tax amount going to a Roth IRA. As entire amountil was rolled over, it was done in a proportional pretax to after tax manner. In Y2010 Fidelity recharacterized the after tax amount from Roth to Traditional citing IRS rules. Notice 2014-54 transition rules should allow a recharacterization of the after tax amounts back to the Roth IRA. Question is how to accomplish this in Y2017 using 1099R, Form 5498, and using Turbotax? Thanks

[dmertz]

Notice 2014-54 does *not* apply because the distribution in 2017 is/would be from an IRA, not from a 401(k).  Once the money has been rolled over to the IRA, in this case via recharacterization of the Roth rollover, IRA rules apply.  The fact that the money originally came from a 401(k) is irrelevant to the application of the IRA pro-rata calculation.  Upon rollover to the IRA, the money immediately loses it's character as having anything to do with a 401(k).

The transition rule of Notice 2014-54 applies only the original distribution from a qualified plan, *not* to a subsequent distribution from an IRA.  The transition rule simply means that the rule can be retroactively applies in reporting the distribution from the qualified plan; many people (apparently including yourself) did split distributions under the principal of Notice 2014-54 before the IRS officially blessed the procedure in Notice 2014-54.  Your distribution was effectively un-split as a result of the recharacterization, no different than had you rolled the entire 401(k) distribution directly to the traditional IRA.