What happens to the funds in your 401(k) account when you are eligible for a distribution, especially if some of the contributions were pre-tax and some were after-tax? The IRS has clarified the old "pro-rata" rules to make the distribution easier.

Under the old rules, part of each distribution had to be allocated between the pre-tax and after-tax portions and taxed accordingly. The new guidelines permit a tax-free conversion of the after-tax contributions to a Roth IRA, while the pre-tax portion can be rolled over directly to a traditional IRA—again with no taxes due at rollover. The new rules also apply to distributions from 403(b) plans and governmental 457 plans.

The new rules permit direct rollovers to two or more accounts and for the employee to select which funds (pre-tax or after-tax) should go into which IRA, as long as the transfers happen at about the same time and the employee informs the plan administrator of the preferred allocation before the time of the rollovers. Though the rules took effect for distributions as of January 1 of this year, the IRS will apply them retroactively for earlier transfers.

For nearly 30 years, Mike Nickerson has owned and managed a small, full-service accounting practice in the Midcoast. He holds a bachelor's degree in accounting from University of Southern Main and a master's degree in financial planning from Bentley University. He is a past board member and president of the Maine Society of Certified Public Accountants and currently serves on the Maine Board of Accountancy.

An aged rock musician, Nickerson now finds musical enjoyment playing upright and electric bass in a variety of bands spanning folk to jazz music genres. He and his wife have three grown children, and they enjoy their free time hiking, kayaking, golfing, bicycling and motorcycling.

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