If a retired CUNY employee rolls over pension funds from the Optional Retirement Program into an IRA, is the entire IRA distribution still exempt from New York income tax?

Plain-English summary

Albert Zelony, a retiree of the City University of New York (CUNY), received a pension funded through CUNY's Optional Retirement Program (ORP), an employer-sponsored qualified pension plan. Once he turned 70 1/2 in 2002, he was required to begin taking minimum distributions, but under his agreement with the ORP's custodian he was also allowed to withdraw more than the required minimum. He planned to roll over all or part of those "cashable" pension funds into a new IRA, either by trustee-to-trustee transfer or rollover, and asked whether the resulting IRA distributions would still be exempt from New York tax the way his CUNY pension itself was, under Tax Law § 612(c)(3)(i).

The Department relied on two earlier advisory opinions involving the same fact pattern - a public pension rolled into an IRA - to split the answer in two. Citing Joseph W. Martiney (1980) and Marie Douglas (1998), the Department held that the part of an IRA distribution that represents a return of the original pension contribution rolled over from CUNY keeps its tax-exempt character under Tax Law § 612(c)(3)(i) and 20 NYCRR 112.3(c)(1), because it is simply the same pension money passing through the IRA. But once pension funds sit inside an IRA, any interest or other gain the IRA earns is no longer "attributable to" Zelony's CUNY employment, so that growth does not qualify for the pension exemption.

Instead, any interest, gain, or other non-contribution amount distributed from the rollover IRA falls under the general pension-and-annuity income modification in Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2), which lets a taxpayer 59 1/2 or older subtract up to $20,000 of qualifying pension and annuity income (combined with any other pension income he has) from federal adjusted gross income. Anything above that $20,000 cap remains taxable.

What this means for you

If you roll a public pension into an IRA

Rolling a New York public pension (such as a CUNY ORP benefit) into an IRA does not convert the whole account into tax-exempt pension income going forward. The portion of any later IRA distribution that traces back to the rolled-over pension contribution stays exempt under Tax Law § 612(c)(3)(i), but interest and earnings the IRA generates afterward are treated as ordinary IRA income, not exempt pension income.

Tracking contributions versus earnings

Because only the "return of contribution" piece is fully exempt, taxpayers (and their accountants) need records that separate the rolled-over pension principal from subsequent earnings within the IRA. The earnings piece is eligible only for the capped $20,000 pension-and-annuity exclusion under Tax Law § 612(c)(3-a) - and only if the taxpayer is at least 59 1/2 - not for an unlimited exclusion.

Coordinating with other pension income

The $20,000 exclusion under § 612(c)(3-a) is a single combined cap. If a taxpayer already has other pension or annuity income using part of that $20,000 allowance, the earnings portion of a rollover IRA distribution is added to it, and only the total up to $20,000 is subtracted from federal adjusted gross income; any excess remains taxable.

Common questions

Q: If I roll my CUNY pension into an IRA, is every dollar I later withdraw from that IRA tax-exempt in New York?
A: No. Only the portion of a distribution that represents a return of the rolled-over pension contribution is exempt under Tax Law § 612(c)(3)(i). Interest, gains, or other income the IRA earns is not covered by that exemption.

Q: What happens to the interest or gains earned inside the rollover IRA?
A: That portion may instead be subtracted under the pension and annuity exclusion in Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2), but only up to a combined total of $20,000, and only because the petitioner had reached 59 1/2 years of age.

Q: Why does the source of the money matter once it's inside an IRA?
A: The Department reasoned that once funds are commingled in an IRA, any subsequent earnings are no longer "attributable to" the petitioner's CUNY employment, so they lose the basis for the government-pension exemption under Article XVI, § 5 of the New York Constitution and Tax Law § 612(c)(3)(i).

Q: Does this opinion rely on any prior rulings?
A: Yes. The Department applied the same split-treatment approach used in Joseph W. Martiney (TSB-H-80-(523)I, 1980) and Marie Douglas (TSB-A-98(4)I, 1998), both of which involved IRAs funded by rollovers of New York public pensions.

Q: Can I rely on this opinion for my own IRA rollover?
A: No. This advisory opinion is limited to the facts Albert Zelony submitted and binds the Department only as to him; other taxpayers should request their own advisory opinion or consult a tax professional.

Citations and references

• Tax Law § 612(a) - defines New York adjusted gross income as federal adjusted gross income with specified modifications
• Tax Law § 612(c)(3)(i) - subtraction for pensions paid to officers and employees of New York State, its subdivisions, and agencies
• Tax Law § 612(c)(3-a) - up to $20,000 exclusion for pension and annuity income of individuals 59 1/2 or older, including qualifying IRA distributions
• 20 NYCRR 112.3(c)(1) - subtraction for public employee pensions actually (not merely deemed) contributed to by New York State or its subdivisions
• 20 NYCRR 112.3(c)(2) - conditions for the $20,000 pension and annuity income modification
• N.Y. Const. art. XVI, § 5 - exempts pensions (as opposed to salaries and wages) of state and local officers and employees from taxation
• Joseph W. Martiney, Adv Op St Tax Commn, November 24, 1980, TSB-H-80-(523)I - rollover IRA principal from a public pension is exempt; earnings are not
• Marie Douglas, Adv Op Comm of T&F, March 24, 1998, TSB-A-98(4)I - same split treatment applied, with earnings capped under the $20,000 exclusion

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a02_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(5)I
Income Tax
July 24, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I020110A

On January 10, 2002, a Petition for Advisory Opinion was received from Albert Zelony,
156-47 89th Street, Howard Beach, New York 11414.
The issue raised by Petitioner, Albert Zelony, is whether a distribution from an Individual
Retirement Account (IRA) established by means of a tax-free rollover of amounts received from the
City University of New York’s Optional Retirement Program may be subtracted from federal
adjusted gross income pursuant to section 612(c)(3)(i) of the Tax Law when computing New York
adjusted gross income.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is retired from the City University of New York (CUNY) and receives a pension
that is funded under the Optional Retirement Program (ORP). The ORP is an employer sponsored
qualified pension plan. All payments received from the ORP accumulation will be paid to him as
a result of his employment with CUNY. When Petitioner reaches 70 ½ years of age in the year
2002, he will begin to take minimum distribution payments from the ORP. Under an agreement
between CUNY and the Custodian of the ORP, a portion of the fund is cashable. That is, Petitioner
is allowed to withdraw more than the required minimum distribution. Petitioner intends to transfer
either all or a portion of the cashable funds from his pension accumulation to a new IRA, either by
trustee-to-trustee transfer or rollover. Because the pension payments are attributable to his
employment with the City of New York, distributions from the retirement plan, including interest
or any other type of gain or income earned, will be exempt from New York State taxation pursuant
to section 612(c)(3)(i) of the Tax Law.
Applicable Law and Regulations
Article 16, section 5 of the New York State Constitution provides that “all salaries, wages
and other compensation, except pensions, paid to officers and employees of the state and its
subdivisions and agencies shall be subject to taxation.”
Section 612(a) of the Tax Law provides:
General. The New York adjusted gross income of a resident individual
means his federal adjusted gross income as defined in the laws of the United States
for the taxable year, with the modifications specified in this section.
Section 612(c) of the Tax Law provides, in part:

-2­
TSB-A-02(5)I
Income Tax
July 24, 2002

Modifications reducing federal adjusted gross income. There shall be
subtracted from federal adjusted gross income:
*

*

*

(3)(i) Pensions to officers and employees of this state, its subdivisions and
agencies, to the extent includible in gross income for federal income tax purposes;
*

*

*

(3-a) Pensions and annuities received by an individual who has attained the
age of fifty-nine and one-half, not otherwise excluded pursuant to paragraph three
of this subsection, to the extent includible in gross income for federal income tax
purposes, but not in excess of twenty thousand dollars, which are periodic payments
attributable to personal services performed by such individual prior to his retirement
from employment, which arise (i) from an employer-employee relationship or (ii)
from contributions to a retirement plan which are deductible for federal income tax
purposes. However, the term “pensions and annuities” shall also include
distributions received by an individual who has attained the age of fifty-nine and
one-half from an individual retirement account or an individual retirement annuity,
as defined in section four hundred eight of the internal revenue code, and
distributions received by an individual who has attained the age of fifty-nine and
one-half from self-employed individual and owner-employee retirement plans which
qualify under section four hundred one of the internal revenue code, whether or not
the payments are periodic in nature. Nevertheless, the term “pensions and annuities”
shall not include any lump sum distribution, as defined in subparagraph (A) of
paragraph four of subsection (e) of section four hundred two of the internal revenue
code and taxed under section six hundred three of this article. Where a husband and
wife file a joint state personal income tax return, the modification provided for in this
paragraph shall be computed as if they were filing separate state personal income tax
returns. Where a payment would otherwise come within the meaning of the term
“pensions and annuities” as set forth in this paragraph, except that such individual
is deceased, such payment shall, nevertheless, be treated as a pension or annuity for
purposes of this paragraph if such payment is received by such individual's
beneficiary.
Section 112.3 of the Personal Income Tax Regulations provides, in part:
The following items are to be subtracted from Federal adjusted gross income
in determining the New York adjusted gross income of a resident individual:
*

*

*

-3­
TSB-A-02(5)I
Income Tax
July 24, 2002

(c)(1) Pensions and other retirement benefits paid to public officers and
public employees of New York State, its political subdivisions or agencies or the
Federal government.
(i) Retirement benefits provided for in clauses (a) and (b) of this
subparagraph which are included in Federal adjusted gross income, relate to services
performed as public officers or public employees and all or a portion of which are
actually contributed to (rather than merely being deemed contributed to) by
New York State, its political subdivisions or agencies or the Federal government,
shall be subtracted in computing New York adjusted gross income:
(a) pensions and other retirement benefits (including, but not limited to,
annuities, interest and lump sum payments) paid to a public officer or public
employee or the beneficiary of a deceased public officer or deceased public
employee of New York State, its political subdivisions or agencies;
*

*

*

(2) Other pension and annuity income.
(i) Pension and annuity income not subject to the modification referred to in
paragraph (1) of this subdivision and not in excess of $20,000, received by an
individual may be subtracted in determining New York adjusted gross income
providing the following conditions are met:
(a) the pension and annuity income must be included in Federal adjusted
gross income;
(b) the pension and annuity income must be received in periodic payments
(except where otherwise provided in this paragraph);
(c) the pension and annuity income must be attributable to personal services
performed by such individual, prior to such individual's retirement from
employment, which arises from either an employer-employee relationship or from
contributions to a retirement plan which are tax deductible under the Internal
Revenue Code ( e.g., individual retirement account [IRA] or self-employed
retirement [Keogh]); and
(d) such individual receiving the pension and annuity income must be 59 ½
years of age or over.
(ii) Distributions from an individual retirement account (IRA) or a
self-employed retirement plan (Keogh) will qualify for the pension and annuity

-4­
TSB-A-02(5)I
Income Tax
July 24, 2002

income modification whether such distributions are periodic payments or a lump sum
distribution....
Opinion
Article 16, section 5 of the New York State Constitution provides that "all salaries, wages
and other compensation, except pensions, paid to officers and employees of the state and its
subdivisions and agencies shall be subject to taxation." Pensions paid to officers and employees of
this state, its subdivisions and agencies, to the extent includible in gross income for federal income
tax purposes is exempt from personal income tax pursuant to section 612(c)(3)(i) of the Tax Law.
In this case, distributions received by Petitioner under the ORP constitute pension and other
retirement benefits paid to a public employee of a subdivision of New York State that are exempt
from taxation.
In Joseph W. Martiney, Adv Op St Tax Commn, November 24, 1980, TSB-H-80-(523)I, it
was held that the distributions from an IRA established by means of a tax-free rollover of amounts
received in the form of a pension from New York State or a subdivision or agency thereof,
represents a nontaxable return of principal to the extent that the distribution represents a return of
the pension funds "rolled over" into the IRA. To the extent that the distribution represents interest,
or any other type of gain earned in the account, such portion would be subject to tax.
In Marie Douglas, Adv Op Comm of T&F, March 24, 1998, TSB-A-98(4)I, like Martiney,
supra, when the petitioner received distributions from a rollover IRA account, only a portion of the
distribution was exempt. The portion of the distribution from the rollover IRA account that
represented the amount of the pension benefit that was rolled over into an IRA (the contribution),
was considered a return of the pension contribution and was exempt from New York State income
tax pursuant to section 612(c)(3)(i) of the Tax Law and section 112.3(c)(1)(i)(a) of the Personal
Income Tax Regulations. Such portion of the IRA distribution was subtracted from federal adjusted
gross income when computing the petitioner’s New York adjusted gross income. However, unlike
Martiney, supra, the balance of the distribution from the rollover IRA account that represented any
other amount in the rollover IRA account, including any other contributions or any interest or other
type of gain or income earned, was allowed to be subtracted in computing New York adjusted gross
income, but only up to $20,000, pursuant to section to section 612(c)(3-a) of the Tax Law and
section 112.3(c)(2) of the Personal Income Tax Regulations.
In this case, if Petitioner rolls over his pension accumulation to an IRA, like Martiney, supra,
when Petitioner receives distributions from the rollover IRA account, only a portion of the
distribution is exempt. Assuming the distributions Petitioner receives from the rollover IRA account
are included in his federal adjusted gross income, the portion of a distribution from the rollover IRA
account that represents the amount of the pension benefit that was rolled over to the IRA
(contribution), is a return of the pension contribution and is exempt from New York State income
tax pursuant to Article 16, section 5 of the New York State Constitution and section 612(c)(3)(i) of

-5­
TSB-A-02(5)I
Income Tax
July 24, 2002

the Tax Law. Such portion of the IRA distribution would be subtracted from federal adjusted gross
income when computing Petitioner's New York adjusted gross income.
With respect to distributions of any gain or income earned from a rollover IRA account,
since the earnings are not attributable to Petitioner’s retirement plan attributable to his employment
with the City University of New York, the interest or any other type of gain or income earned is not
exempt from New York State taxation pursuant to Article 16, section 5 of the New York State
Constitution and section 612(c)(3)(i) of the Tax Law.
However, like Marie Douglas, supra, pursuant to section 612(c)(3-a) of the Tax Law and
section 112.3(c)(2) of the Personal Income Tax Regulations, the balance of the distributions that
represents an amount other than a return of the pension contribution in the rollover IRA account,
including any other contributions or any interest or other type of gain or income earned, may be
allowed to be subtracted in computing New York adjusted gross income, but only up to $20,000.
Since Petitioner has reached the age of 59 ½ years of age, such amount may be added to Petitioner’s
other pension and annuity income, if any, that meets the conditions of section 612(c)(3-a) of the Tax
Law and section 112.3(c)(2) of the Regulations for purposes of computing the up to $20,000 pension
and annuity income modification. The total, but not in excess of $20,000, would be allowed as a
subtraction from federal adjusted gross income when computing Petitioner's New York adjusted
gross income. Any excess would not be allowed as a subtraction from federal adjusted gross income
when computing Petitioner's New York adjusted gross income.

DATED: July 24, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.