What IRS Notice 2014-54 Changed for Rollovers

IRS Notice 2014-54 is the 2014 guidance that lets you split a single distribution from an employer retirement plan so that pre-tax money rolls into a Traditional IRA while after-tax contributions go directly into a Roth IRA, with no tax owed on either piece. Before the notice, the pro-rata rule made it nearly impossible to isolate after-tax basis and send it to a Roth without dragging taxable pre-tax dollars along for the ride. Get the mechanics right and the split is clean; get the ordering or the timing wrong and you can create a tax bill on money you were trying to protect.

The Pro-Rata Problem It Solved

When your 401(k) or similar plan holds both pre-tax and after-tax money, every distribution normally carries a proportional share of each. That is the pro-rata rule.¹ If 80% of your account is pre-tax and 20% is after-tax, every dollar out the door is treated as 80 cents taxable and 20 cents tax-free, no matter which bucket you meant to tap.

After-tax basis exists because some employees contribute money that was never deducted from taxable income. You already paid tax on it, so it shouldn’t be taxed again. The problem was that pro-rata treatment mixed that basis with taxable pre-tax money in every transaction, making a clean Roth conversion of the basis painfully inefficient. On a $100,000 account with $20,000 of basis, a $50,000 rollover to a Roth would have been treated as $40,000 taxable and only $10,000 tax-free. You’d owe income tax on $40,000 just to move $10,000 of basis into a Roth.

How the Ordering Rule Works

Notice 2014-54 did not eliminate pro-rata. Each distribution still contains its proportional share of pre-tax and after-tax money. What changed is how those components can be directed once the money leaves the plan.²

The mechanism is an ordering rule. When multiple disbursements from the plan are scheduled at the same time, the IRS treats them as a single distribution. Pre-tax money is then assigned first to whatever portion is being rolled over. If the rollover amount is large enough to absorb all the pre-tax money, whatever is left flowing to a second destination is entirely after-tax basis.²

In practice, you instruct the plan administrator to send two direct rollovers at once: one to a Traditional IRA for the pre-tax portion, one to a Roth IRA for the after-tax basis. The pre-tax amount fills the Traditional IRA transfer first. The remainder, being basis you already paid tax on, arrives in the Roth free of tax.¹ Nobody owes anything at the time of the split.

Earnings on After-Tax Contributions Are Pre-Tax

This is the point that catches people. Your after-tax contributions may have generated investment earnings inside the plan, and those earnings are pre-tax money, not after-tax.¹ The IRS is explicit on that classification.

Under the notice, those earnings get lumped in with the rest of the pre-tax money and assigned to the Traditional IRA rollover. Only your original after-tax contributions flow to the Roth IRA. That is actually the outcome you want: your basis reaches the Roth without dragging taxable earnings along, and the earnings stay tax-deferred in the Traditional IRA until you pull them out later.

If after-tax dollars have been sitting and growing for years, the earnings can be substantial. You need to know your exact basis figure before instructing the administrator, or you risk rolling taxable money into the Roth and owing income tax on it.

A Split Rollover in Numbers

Say your 401(k) holds $100,000: $80,000 in pre-tax contributions and earnings, and $20,000 in after-tax contributions. You leave the employer and want a split rollover.

You instruct the plan administrator to make two direct rollovers at the same time. The first sends $80,000 to your Traditional IRA. The second sends $20,000 to your Roth IRA. The notice treats these simultaneous disbursements as one distribution. The $80,000 of pre-tax money fills the Traditional IRA rollover first. The remaining $20,000 is entirely after-tax basis and lands in the Roth IRA tax-free.¹

No income tax is owed on any part of the transaction. The Traditional IRA balance stays tax-deferred. The Roth balance is a return of basis, and its future growth is tax-free.

When You Also Take Cash

The same ordering principle applies when part of the distribution is paid to you. Pre-tax amounts fill rollovers first, and whatever character remains gets assigned to the cash portion.²

Using the same $100,000 account, suppose you roll $80,000 to a Traditional IRA, roll $10,000 to a Roth IRA, and take $10,000 in cash. The Traditional IRA rollover absorbs all $80,000 of pre-tax money. The $10,000 going to the Roth is after-tax basis. The $10,000 cash is also after-tax basis, so it is not taxable either.¹

The math flips if the rollover is smaller than the pre-tax balance. Roll $60,000 to a Traditional IRA and the rollover absorbs only $60,000 of the $80,000 in pre-tax money. The remaining $20,000 of pre-tax dollars is assigned next to any 60-day rollover, then to cash. In that scenario, part of your cash distribution becomes taxable. The more you roll over, the cleaner the tax result on whatever is left.

Direct Rollover Versus 60-Day Rollover

Both methods work under the notice. One is safer by a wide margin.

Direct Rollover

In a direct rollover, the plan administrator sends the money straight to the receiving IRA custodians. No check passes through your hands, and the mandatory 20% federal withholding that applies to distributions paid to you personally does not apply.³ The administrator prepares two transfers: one payable to your Traditional IRA custodian for the pre-tax portion, one payable to your Roth IRA custodian for the after-tax basis.

Give the administrator written instructions specifying dollar amounts and receiving accounts before the distribution date. Those instructions drive how the 1099-R gets coded. Larger plans handle split rollovers routinely; smaller plans sometimes need you to reference Notice 2014-54 by name.

60-Day Rollover

If the money is paid to you, you have 60 days from receipt to deposit it into the correct IRA accounts.³ The plan must withhold 20% of the taxable portion before sending the check.¹ To roll over the full intended amount, you replace that withheld 20% from your own funds and deposit the complete pre-tax figure into the Traditional IRA. You recover the withheld amount when you file your return.

Miss the 60-day window and the unrolled portion becomes a taxable distribution. If you are under 59½, the taxable amount can also trigger a 10% early withdrawal penalty unless an exception applies.⁴ The IRS grants hardship waivers of the 60-day deadline in limited circumstances, but a waiver is not a plan.

One helpful point: the one-rollover-per-year limit that restricts IRA-to-IRA transfers does not apply to rollovers from employer plans to IRAs.³ A split from a 401(k) counts as plan-to-IRA, not IRA-to-IRA.

For almost everyone, the direct rollover is the right call.

How the Split Gets Reported

Form 1099-R

The plan administrator reports the distribution on Form 1099-R, issuing separate 1099-R forms for each transfer when the disbursement splits across destinations. Each form shows the gross distribution in Box 1, the taxable amount in Box 2a, and your after-tax contributions in Box 5. A direct rollover to a Traditional IRA gets Code G in Box 7.⁵

Check the forms when they arrive. If Box 5 does not match your basis records, or the codes look off, contact the administrator right away. An incorrect 1099-R can cause the IRS to treat tax-free basis as taxable income.

Form 8606

When after-tax amounts move from a qualified plan into a Roth IRA, you track them on Form 8606. The instructions require you to report rollovers from qualified retirement plans to Roth IRAs on line 24, which establishes your cost basis in the Roth.⁶ That basis matters years later when you start taking Roth distributions and need to show which dollars were contributions and which were earnings.

On Form 1040, report the total distribution on the pensions and annuities line, then subtract the rollover amounts to arrive at the net taxable portion. If everything was rolled over, the taxable amount is zero. Keep the plan administrator’s basis statement, both 1099-R forms, and your completed Form 8606 indefinitely. The IRS can question the tax treatment of Roth distributions years after the original rollover.

Mistakes That Create Tax Bills

Not requesting simultaneous disbursements. The notice requires the transfers to be scheduled at the same time to be treated as a single distribution. Roll the pre-tax money in January and the after-tax money in March, and the IRS may apply pro-rata to each transfer separately, undoing the whole strategy.
Ignoring earnings on after-tax contributions. If your basis is $20,000 but the after-tax subaccount is worth $25,000, only $20,000 belongs in the Roth. Send $25,000 and $5,000 of it is taxable.
Missing the 60-day deadline. Day 61 turns your rollover into a taxable distribution, potentially with an early withdrawal penalty on top.
Giving the administrator vague instructions. Put allocation directions in writing with specific dollar amounts and account details before the distribution date. Vague instructions can trigger pro-rata treatment or an unintended Roth conversion of pre-tax money.
Skipping Form 8606. Without it, the IRS has no record that your Roth rollover was a return of basis, and a later Roth distribution that should be tax-free can be flagged as taxable.

The Mega Backdoor Roth Connection

Notice 2014-54 is the engine behind the strategy planners call the mega backdoor Roth. If your 401(k) accepts after-tax contributions beyond the normal elective deferral limit ($24,500 for 2026), you can contribute additional after-tax dollars up to the plan’s overall annual additions limit.⁷ A split rollover then moves those after-tax contributions into a Roth IRA, either at separation or through in-service distributions if the plan permits.

Two plan features have to be present. The plan must accept voluntary after-tax (non-Roth) employee contributions beyond the standard elective deferral limit. And if you want to convert while still employed, the plan must allow in-service withdrawals of the after-tax balance. Without in-service access, you wait until you leave the job. Check the summary plan description or ask your benefits department before making after-tax contributions in expectation of using this strategy.

1
Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans
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Internal Revenue Service. Notice 2014-54 – Guidance on Allocation of After-Tax Amounts to Rollovers
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Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
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Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
5
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
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Internal Revenue Service. Instructions for Form 8606 (2025)
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Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500