If I roll over my SUNY pension into an IRA, what portion of my later IRA distributions is exempt from New York income tax?

Plain-English summary

Larry J. Green, a former State University of New York (SUNY) employee, held his SUNY pension in two Optional Retirement Plan accounts with College Retirement Equities Fund (C.R.E.F.) and Variable Annuity Life Insurance Company (V.A.L.I.C.). In October 2001, he rolled the entire balance of both accounts into a private IRA. He was over age 59½. He asked the Department two things: how much of a later distribution from that rollover IRA could be subtracted from federal adjusted gross income in computing New York adjusted gross income, and how to calculate the exempt portion versus the taxable interest or gain.

The Department relied on its own 1980 precedent, Joseph W. Martiney (TSB-H-80-(523)I), which held that distributions from an IRA funded by a tax-free rollover of a New York State pension are a nontaxable return of principal to the extent they represent the rolled-over pension funds; any interest or other gain earned in the account is taxable. Applying that rule here, the Department concluded that when Petitioner takes distributions from his rollover IRA, only the portion attributable to the original SUNY pension contributions (the C.R.E.F. and V.A.L.I.C. amounts rolled over) is exempt as a return of contribution; that portion is subtracted from federal adjusted gross income in computing New York adjusted gross income.

To find that exempt portion for a given year, the Department prescribed a formula: divide the contributions rolled over from the SUNY pension accounts by the total value of the IRA (including the amount of the distribution) as of the date of distribution, then multiply the result by the amount actually distributed. That computation is repeated for the initial distribution year and each subsequent year until the entire nontaxable contribution has been recovered. The Department noted this method parallels the approach in IRS Notice 87-16 for recovering nondeductible IRA contributions.

The remaining part of each distribution - the amount that isn't a return of contribution - is not automatically tax-exempt. But because Petitioner is over 59½, that remaining amount may be combined with any other qualifying pension and annuity income under Tax Law § 612(c)(3-a) toward New York's $20,000 pension and annuity exclusion. The combined total, capped at $20,000, is subtracted from federal adjusted gross income; anything above that cap remains taxable.

What this means for you

If you rolled a New York public pension into an IRA

Only the slice of each IRA distribution that traces back to the actual pension contributions you rolled over is treated as a nontaxable return of principal. The rest of the account - investment earnings and gains accumulated after the rollover - doesn't get this automatic exemption and is analyzed separately.

Calculating the exempt portion of each distribution

Divide the rolled-over pension contributions still remaining in the account by the IRA's total value (including the current distribution) as of the distribution date, then multiply by the amount distributed. Repeat this calculation each year a distribution is taken, until the full nontaxable contribution amount has been recovered. This mirrors the recovery method the IRS uses for nondeductible IRA contributions under IRS Notice 87-16.

If you're 59½ or older

The non-exempt portion of a rollover IRA distribution (interest or gain) isn't automatically taxable in full. If you've reached 59½, it can be added to any other pension and annuity income you have toward the $20,000 modification under Tax Law § 612(c)(3-a), reducing New York adjusted gross income - subject to the $20,000 annual cap, with any excess remaining taxable.

Common questions

Q: Is my entire IRA distribution exempt from New York tax because it came from a rollover of my SUNY pension?
A: No. Only the portion representing the original rolled-over pension contributions is exempt as a return of principal. The remainder is treated as interest or gain and is analyzed under a separate rule.

Q: How do I figure out what part of a distribution is exempt?
A: Divide the rolled-over pension contributions remaining in the IRA by the account's total value (including the distribution) at the date of distribution, then multiply by the amount distributed. Do this each year until the nontaxable contribution amount is fully recovered.

Q: What happens to the taxable portion of the distribution?
A: If you're 59½ or older, it can be added to your other qualifying pension and annuity income for purposes of the $20,000 exclusion under Tax Law § 612(c)(3-a); the combined total above $20,000 remains taxable.

Q: Does the return-of-principal treatment depend on the recipient's age?
A: No - the opinion applied the return-of-contribution rule "regardless of Petitioner's age at the time of distribution." Age 59½ only matters for the separate $20,000 pension and annuity exclusion.

Q: Does this ruling apply to lump-sum distributions?
A: The $20,000 exclusion under Tax Law § 612(c)(3-a) does not apply to a lump sum distribution as defined under the Internal Revenue Code and taxed under Tax Law § 603; this opinion addressed periodic-style distributions from Petitioner's rollover IRA.

Citations and references

• Tax Law § 612(a) - New York adjusted gross income defined by reference to federal adjusted gross income
• Tax Law § 612(c)(3)(i) - subtraction for pensions to officers and employees of New York State, its subdivisions, and agencies
• Tax Law § 612(c)(3-a) - up to $20,000 pension and annuity exclusion for individuals age 59½ and older, extending to IRA and self-employed/owner-employee (Keogh) plan distributions
• 20 NYCRR 112.3(c)(2)(ii) - IRA and Keogh distributions qualify for the pension and annuity income modification whether periodic or lump sum
• Joseph W. Martiney, TSB-H-80-(523)I (Nov. 24, 1980) - precedent opinion establishing return-of-principal treatment for a rollover IRA funded by a New York pension
• IRS Notice 87-16, 1987-1 C.B. 446 - IRS method for recovering nondeductible IRA contributions, cited as an analogous computation method

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a03_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(4)I
Income Tax
November 19, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I030617A

On June 17, 2003, a Petition for Advisory Opinion was received from Larry J. Green, c/o
David A. Schlein, CPA, Lumsden & McCormick, LLP, 403 Main St., Ste 430, Buffalo, New York
14203.
The issues raised by Petitioner, Larry J. Green, are:

1. What portion of the distribution from an Individual Retirement Account (IRA) established
   by means of a rollover of tax exempt pension funds may be subtracted from federal adjusted
   gross income when computing New York adjusted gross income for personal income tax
   purposes under Article 22 of the Tax Law; and
2. If the IRA distribution is partially exempt, what method is used to distinguish the amount
   that represents a return of tax exempt pension funds rolled over into an IRA from interest
   or any other gain accrued.
   Petitioner submits the following facts as the basis for this Advisory Opinion.
   Petitioner was an employee of the State University of New York (SUNY). His SUNY
   pension was held in two Optional Retirement Plans with College Retirement Equities Fund
   (C.R.E.F.) and Variable Annuity Life Insurance Company (V.A.L.I.C.). During October 2001, the
   entire balance of the two SUNY accounts was rolled over into a private IRA. Petitioner’s age is
   over 59 1/2 years. All amounts contributed to the IRA were rolled over from his SUNY pension
   accounts. All earnings credited to the rollover IRA were earned on the accounts transferred from
   his SUNY pension accounts.
   Applicable law and regulations
   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:

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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(c)(2)(ii) of the New York State Personal Income Tax Regulations provides,
in part:
Distributions from an individual retirement account (IRA) or a self-employed
retirement plan (Keogh) will qualify for the pension and annuity income modification
whether such distributions are periodic payments or a lump sum distribution....

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Income Tax
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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."
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 accordance with Martiney, supra, when Petitioner receives distributions from the rollover
IRA account, only a portion of the distribution is exempt. Regardless of Petitioner’s age at the time
of distribution, 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 from Petitioner’s SUNY pension accounts (C.R.E.F. and
V.A.L.I.C.) that were rolled over into the IRA (the contribution), is a return of the contribution and
is exempt from New York State personal income tax. Such portion of the IRA distribution would
be subtracted from federal adjusted gross income when computing Petitioner's New York adjusted
gross income for the taxable year.
Assuming that a distribution during the taxable year is a partial distribution of an IRA
established by means of a tax-free rollover, to determine the amount of distribution that represents
a return of nontaxable funds, the amount of contributions rolled over from the SUNY pension
accounts to the IRA should be divided by the total value of the IRA, including the amount of
distribution, at the date of distribution and the result should be multiplied by the amount distributed.
This computation is used for the initial year that a distribution is made and each succeeding year
until the total amount of nontaxable contributions is recovered. This method essentially parallels
the method prescribed in Internal Revenue Service Notice 87-16, 1987-1 CB 446, for determination
of the portion of a distribution from an IRA that is attributable to the return of nondeductible
contributions.
In addition, section 612(c)(3-a) of the Tax Law and section 112.3(c)(2) of the Personal
Income Tax Regulations provide that the balance of the distribution from the rollover IRA account
that represents any other amount in the rollover IRA account may not be subject to tax. Since
Petitioner is over the age of 59 ½ years, 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 Personal Income Tax Regulations for purposes of computing the $20,000 pension
and annuity income modification. The total, but not in excess of $20,000, would be allowed as a

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Income Tax
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subtraction from federal adjusted gross income when computing Petitioner's New York adjusted
gross income. Any excess would be subject to tax and would not be allowed as a subtraction from
federal adjusted gross income when computing Petitioner's New York adjusted gross income.

DATED: November 19, 2003

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.