Did Louisiana's tax exemption for DROP account benefits continue after the money was transferred into an IRA?

Plain-English summary

Louisiana's exemption applied to money disbursed from a qualifying deferred retirement option plan account, but it did not follow the money into an IRA. Later IRA payments were not benefits paid under Chapter 1, Title 11 and therefore did not receive the specific exemption in La. R.S. 11:405.

The ruling treated the account making the payment as decisive for this exemption.

Why DROP payments were exempt

La. R.S. 11:405 exempted an annuity, retirement allowance, benefit, contribution refund, optional benefit, or other benefit paid under Chapter 1, Title 11 from state and municipal tax, subject to the stated Section 11:292 exception.

The Department said money in DROP accounts qualified as retirement benefits or allowances under that statute. A disbursement from the DROP account was therefore exempt from Louisiana individual income tax.

The ruling also cited Revenue Ruling 03-008 for treating benefits paid from self-directed subaccounts within DROP accounts as exempt because they were still paid under Chapter 1.

Why later IRA payments were different

An IRA disbursement was not a benefit paid under Chapter 1, Title 11. The ruling stated that the Louisiana Revised Statutes did not otherwise provide an exemption for those IRA disbursements.

Once the funds moved to the IRA, payments later made by the IRA no longer qualified under Section 11:405.

What this means for you

DROP account participants

The ruling distinguished a direct DROP disbursement from a later payment by an IRA custodian. Moving the funds changed the statutory source of future payments.

Taxpayers considering a rollover

Do not assume a state exemption tied to a public retirement chapter permanently attaches to transferred dollars. Analyze the initial payment and later IRA withdrawals separately.

Accountants and tax professionals

Check the exact retirement chapter, destination account, and current Louisiana law. This ruling did not decide federal rollover tax treatment.

Common questions

Q: Was a payment directly from a qualifying DROP account exempt?

A: Yes.

Q: Did the exemption continue after transfer to an IRA?

A: No.

Q: Did self-directed DROP subaccounts qualify?

A: The ruling cited prior guidance saying their benefits were exempt when paid under Chapter 1.

Q: Did this ruling decide federal rollover treatment?

A: No. It addressed Louisiana individual income tax.

Citations and references

• La. R.S. 11:405 — tax exemption for covered Chapter 1 retirement benefits
• La. R.S. 11:292 — exception referenced in the quoted provision
• Louisiana Revenue Ruling 03-008 — cited treatment of self-directed DROP subaccount benefits
• Chapter 1, Title 11 of the Louisiana Revised Statutes — covered retirement provisions
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 07-001

Original ruling text

Revenue Ruling No. 07-001
May 4, 2007
Individual Income Tax
Taxability of Money Transferred from DROP Accounts to an IRA
Purpose
The purpose of this Revenue Ruling is to address whether or not money transferred from a deferred
retirement option plan (DROP) account into an individual retirement account (IRA) will be taxable for
Louisiana individual income tax purposes and whether these amounts will be taxable for Louisiana
income tax purposes when withdrawn from an IRA.
Background/Analysis
La. R.S. 11:405 provides for a state tax exemption for benefits paid out under the provisions of Chapter
1, Title 11. R.S. 11:405 state in pertinent part:
§ 405 Exemption from execution; exception. Any annuity, retirement allowance or
benefit, or refund of contributions, or any optional benefit or any other benefit paid
or paid to any person under the provisions of this Chapter is exempt from any state
or municipal tax and is exempt from levy and sales, garnishment, attachment, or
any other process whatsoever, except as provided in R.S. 11:292, and is
unassignable.
Money in DROP accounts qualify as retirement benefits or allowances under the statute and are exempt
from Louisiana individual income tax when withdrawn from the account. As stated in Revenue Ruling
03-008, benefits paid by the self-directed sub-accounts within DROP accounts are exempt from state
taxation because these benefits are paid under the provisions of Chapter 1 Title 11. However,
disbursements from other retirement accounts such as IRAs are not benefits paid under the provisions of
Chapter 1 Title 11 of the Revised Statutes; therefore, the Louisiana Revised Statutes do not provide an
exemption for disbursements from IRAs.
Ruling
For Louisiana individual income tax purposes, retirement benefits paid under the provisions of Chapter
1 Title 11 of the Louisiana Revised Statutes, including disbursements of money from DROP accounts,
are exempt from state taxation. However, once funds are transferred to an IRA, any payments from the
IRA are not exempt under the provisions of Chapter 1 Title 11.
Cynthia Bridges
Secretary
A Revenue Ruling is issued under the authority of LAC 61III.101.C. A Revenue Ruling is written to provide guidance to the
public and to Department of Revenue employees. It is a written statement issued to apply principles of law to a specific set of
facts. A Revenue Ruling does not have the force and effect of law and is not binding on the public. It is a statement of the
department's position and is binding on the department until superseded or modified by a subsequent change in statute,
regulation, declaratory ruling, or court decision.