If a surviving spouse who is not yet 59 1/2 elects to treat his late wife's IRA as his own, can he still claim New York's $20,000 pension and annuity income subtraction as her beneficiary?

Plain-English summary

Petitioner was the sole beneficiary of his late wife's individual retirement account (IRA) and had not yet reached age 59 1/2. Had his wife lived and taken distributions from her own IRA, she would have qualified for New York's $20,000 pension and annuity income subtraction under Tax Law § 612(c)(3-a). Petitioner asked whether he, as a surviving-spouse beneficiary, could claim that same $20,000 subtraction, and specifically whether he could still claim it if he elected to treat his late wife's IRA as his own.

The Department explained that Tax Law § 612(c)(3-a) itself only reaches individuals who have attained age 59 1/2. But a regulation, 20 NYCRR 112.3(c)(2)(iv)(a), extends the subtraction to a beneficiary who receives a payment qualifying as a pension or annuity created by the decedent - the beneficiary gets whatever subtraction the decedent would have gotten, regardless of the beneficiary's own age. Because Petitioner was currently his wife's IRA beneficiary, he could claim the subtraction under that regulation even though he was under 59 1/2.

The catch was Petitioner's plan to elect to treat the IRA as his own (a rollover under IRC § 408(d)), which he was considering in order to postpone the required minimum distributions he would otherwise face when his late wife would have turned 70 1/2 under IRC § 408(a)(6). The Department concluded that making that election converts Petitioner from a beneficiary into the IRA's owner - and an owner is not a "beneficiary" for purposes of 20 NYCRR 112.3(c)(2)(iv)(a). Once he owns the IRA outright, the beneficiary-based extension of the subtraction no longer applies to him, and he must wait until he personally turns 59 1/2 to qualify for the $20,000 subtraction under Tax Law § 612(c)(3-a).

What this means for you

Surviving spouses weighing an IRA rollover election

If you're under 59 1/2 and are the beneficiary of a deceased spouse's IRA, you can currently claim New York's $20,000 pension and annuity subtraction as a beneficiary, regardless of your age. But electing to treat that IRA as your own - which can be useful to delay required minimum distributions - comes at a New York income tax cost: you lose beneficiary status and, with it, the subtraction, until you turn 59 1/2 yourself.

Accountants and tax professionals

When advising a surviving spouse on whether to elect ownership of a deceased spouse's IRA, weigh the federal benefit (deferring required minimum distributions under IRC § 408(a)(6)) against the New York state income tax cost (losing the $20,000 subtraction under Tax Law § 612(c)(3-a) as extended by 20 NYCRR 112.3(c)(2)(iv)(a) until age 59 1/2). The rollover election under IRC § 408(d) is what triggers the change in status from beneficiary to owner.

Common questions

Q: Can a surviving spouse under 59 1/2 claim New York's $20,000 pension subtraction as a beneficiary of a deceased spouse's IRA?
A: Yes, while he remains a beneficiary. 20 NYCRR 112.3(c)(2)(iv)(a) lets a beneficiary claim the same pension and annuity subtraction the decedent would have been entitled to, regardless of the beneficiary's own age.

Q: What happens if that surviving spouse elects to treat the IRA as his own?
A: He stops being a "beneficiary" and becomes the IRA's owner instead. The beneficiary-based subtraction under 20 NYCRR 112.3(c)(2)(iv)(a) no longer applies to him once he makes that election.

Q: Once he's the owner, when can he claim the $20,000 subtraction again?
A: Only once he personally reaches age 59 1/2, as required by Tax Law § 612(c)(3-a) for individuals claiming the subtraction in their own right (rather than as a beneficiary).

Q: Why would a surviving spouse elect to treat the IRA as his own in the first place?
A: According to the facts described, Petitioner was considering the election to postpone the required minimum distributions he would otherwise have to take when his late wife would have reached age 70 1/2, as required by IRC § 408(a)(6).

Citations and references

• Tax Law § 612(c)(3-a) - subtraction modification of up to $20,000 for pensions and annuities received by an individual who has attained age 59 1/2, attributable to personal services performed prior to retirement
• 20 NYCRR 112.3(c)(2) - pension/annuity income must arise from an employer-employee relationship or from a tax-deductible retirement plan such as an IRA or Keogh plan
• 20 NYCRR 112.3(c)(2)(iv)(a) - a beneficiary who receives a payment qualifying as a decedent's pension or annuity is entitled to the same subtraction the decedent would have received, regardless of the beneficiary's age
• IRC § 408(a)(6) - requires minimum IRA distributions once the account owner reaches age 70 1/2
• IRC § 408(d) - governs the rollover of an IRA into an IRA owned by the recipient

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a11_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-11(2)I
Income Tax
February 18, 2011

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I101213B

On December 14, 2010 the Department of Taxation and Finance received a Petition for Advisory
Opinion from name and address redacted. Petitioner, who has not yet reached the age of 59½, asks
whether a surviving spouse who elects to treat his deceased spouse’s individual retirement account as his
own qualifies as a beneficiary and can subtract up to the $20,000 limit from his New York taxable income
as provided for under Tax Law §612(c)(3-a).
We conclude that, if Petitioner elects to treat his late wife’s individual retirement account as his
own he will no longer qualify as a beneficiary for purposes of the $20,000 income subtraction
modification under Tax law §612(c)(3-a).
Facts
Petitioner is the sole beneficiary of his late wife’s individual retirement account (IRA) and has
not attained the age of 59½. If Petitioner’s wife was still living and received distributions from her IRA,
she would have qualified for the $20,000 income subtraction under Tax Law §612(c)(3-a). Petitioner,
however, is considering electing to treat his late wife’s IRA as his own in order to postpone the minimum
distributions that would be necessary when his late wife would have reached the age of 70½ as required
by Internal Revenue Code §408(a)(6). Petitioner from time to time may elect to receive distributions
from this IRA before he attains the age of 59½.
Analysis
Tax Law §612(c)(3-a) provides a subtraction modification from federal adjusted gross income for
“[p]ensions 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 [Tax Law § 612(c)], 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 . . .”. Regulation 20 NYCRR
§112.3(c)(2), which explains the employer-employee relationship under Tax Law §612(c)(3-a), states that
“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)”.
Additionally, Regulation 20 NYCRR §112.3(c)(2)(iv)(a) provides that “[w]here a beneficiary receives a
payment which qualifies as a pension or annuity created by the decedent, such payment will come within
the definition and meaning of ‘pension and annuity’ as defined in this paragraph. The beneficiary will be
entitled to the same pension and annuity income modification that the decedent would have been entitled
to, had such decedent continued to live, regardless of the age of the beneficiary”.

-2-

TSB-A-11(2)I
Income Tax
February 18, 2011

While Petitioner has not attained the age of 59½ as required by Tax Law §612(c)(3-a) to qualify
for the income subtraction modification of up to $20,000 of pension and annuity income received by an
individual, Regulation 20 NYCRR §112.3(c)(2)(iv)(a) extends this subtraction modification to a
beneficiary of a pension and annuity regardless of the beneficiary’s age. Therefore, to currently qualify
for the income subtraction modification, under Tax Law §612(c)(3-a), Petitioner must be a beneficiary of
his wife’s IRA. According to the facts submitted, Petitioner is the sole beneficiary of his wife’s IRA and
is considering making an election to become the owner of this IRA. In order to do this, Petitioner must
elect to rollover his wife’s IRA into an IRA owned by him as provided for under IRC §408(d). If
Petitioner makes this election, however, he will no longer be a beneficiary.
Accordingly, if Petitioner becomes the IRA’s owner, the extension of the $20,000
income subtraction modification to beneficiaries allowed under Regulation 20 NYCRR
§112.3(c)(2)(iv)(a) will no longer apply to him and he must wait until he has attained the age of 59½ to
qualify for the income subtraction modification under Tax law §612(c)(3-a).

DATED: February 18, 2011

NOTE:

/S/
DANIEL SMIRLOCK
Deputy Commissioner and Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set
forth therein and is binding on the Department only with respect to the person or entity to
whom it is issued and only if the person or entity fully and accurately describes all relevant
facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect
as of the date the Opinion is issued or for the specific time period at issue in the Opinion.