In 2014, the IRS issued a seemingly obscure Revenue Notice (2014-54) to clarify how retirement plan distributions may be allocated when they consist of both pre-tax amounts and after-tax contributions.

Now, some financial advisors say that, with this ruling, the IRS has implicitly blessed a potentially attractive new planning technique, as follows:

1. If a 401(k) or 403(b) plan allows, the account owner makes after-tax contributions in excess of the annual elective deferral limit. This creates two accounts within the plan: pre-tax money (deferrals + all earnings) and after-tax contributions (excess contributions).

2. At a trigger event, the account owner takes a full distribution of both accounts, transferring 100% to personal IRAs. All of the pre-tax money is allocated to a Traditional IRA. All of the after-tax money is transferred to a Roth IRA.

3. Income tax can be deferred in the Traditional IRA until minimum distributions are required, and it can be deferred in the Roth IRA for life.

Thus, the strategy opens a back door to creating a Roth IRA for retirement.

Prior to the Revenue Ruling, each distribution had to be allocated pro rata into pre-tax and after-tax portions, with the after-tax portion ineligible for a transfer. The owner could have distributed the after-tax portion tax-free.