If a retired SUNY employee does a direct trustee-to-trustee rollover of 401(a) and 403(b) tax-deferred annuities into an IRA, is the rolled-over money later taxed as New York income?

Plain-English summary

Petitioner is a retired employee of a State University of New York (SUNY) college who is the beneficiary of two SUNY Optional Retirement Plans - a tax-deferred annuity under Internal Revenue Code § 403(b) and a plan under Internal Revenue Code § 401(a) - both then maintained by TIAA-CREF (the "Existing Plans"). Petitioner wanted to move those Existing Plans, through a direct trustee-to-trustee rollover, into an IRA at a different financial institution, and asked the Department whether doing so would create New York personal income tax consequences.

The Department concluded that because the Existing Plans were funded with contributions from SUNY - a New York State public employer - the portion of any future distribution from the new IRA that is attributable to the rolled-over contribution is not included in New York taxable income. That result flows from Tax Law § 612(c)(3)(i), which subtracts from federal adjusted gross income pensions paid to officers and employees of New York State, its subdivisions, and agencies, to the extent those pensions relate to the individual's services and were actually funded by the state employer (20 NYCRR 112.3(c)(1)).

The Department relied on its own prior guidance holding that when a New York public pension is rolled over into an IRA, the portion of a later IRA distribution that is a return of the rolled-over principal remains a nontaxable distribution (TSB-A-09(9)I; see also TSB-A-09(7)I; TSB-A-02(5)I). Any part of an IRA distribution that is not attributable to that rollover principal - for example, subsequent earnings - is not covered by this exemption, though it may still be eligible for the general $20,000 pension and annuity subtraction available to taxpayers age 59 1/2 or older under Tax Law § 612(c)(3-a).

What this means for you

Retired SUNY (and other NY public) employees rolling plans into an IRA

If your tax-deferred annuity or retirement plan was funded by contributions from SUNY or another New York State public employer, doing a direct trustee-to-trustee rollover into an IRA does not, by itself, make that money taxable in New York. When you later draw down the new IRA, the part of each distribution that represents a return of the rolled-over contribution keeps its exemption under Tax Law § 612(c)(3)(i).

Accountants and tax professionals tracking IRA distributions after a public-pension rollover

Because only the portion of a distribution attributable to the rollover principal is exempt, you need to track the source and amount of the rolled-over contribution so that later IRA withdrawals can be separated into an exempt return-of-principal component and a taxable component (such as post-rollover earnings). The taxable component isn't automatically fully taxed either - it may still qualify for the separate $20,000 pension and annuity subtraction under Tax Law § 612(c)(3-a) once the taxpayer is at least 59 1/2.

Common questions

Q: Does rolling over a SUNY 401(a)/403(b) annuity into an IRA trigger New York income tax at the time of the rollover?
A: The opinion addresses the tax treatment of later distributions from the new IRA, not the rollover transaction itself; a direct trustee-to-trustee transfer does not, by its nature, generate a distribution to the taxpayer.

Q: Once the money is in the new IRA, is every distribution from it exempt from New York tax?
A: No. Only the portion of a distribution attributable to the rolled-over contribution from the Existing Plans is exempt under Tax Law § 612(c)(3)(i). Other amounts received are taxable, though possibly eligible for the § 612(c)(3-a) subtraction.

Q: Why did the source of the original contributions matter here?
A: Under 20 NYCRR 112.3(c)(1), the pension exemption in Tax Law § 612(c)(3)(i) applies only where the benefits relate to the individual's services and were actually contributed (not merely deemed contributed) by New York State. Because SUNY, a New York State public employer, funded the Existing Plans, that requirement was satisfied.

Q: Does this opinion apply to a rollover from a private-sector 401(k) or 403(b)?
A: No. The exemption here rests specifically on the Existing Plans having been funded by a New York State public employer (SUNY); the ruling does not address rollovers from privately funded retirement plans.

Q: Is there a separate exemption if the rolled-over amounts don't qualify under § 612(c)(3)(i)?
A: Yes. Tax Law § 612(c)(3-a) lets a taxpayer who is at least 59 1/2 subtract up to $20,000 of pension and annuity income that isn't otherwise exempt under § 612(c)(3).

Citations and references

• 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) - $20,000 pension and annuity income subtraction for taxpayers age 59 1/2 or older
• 20 NYCRR 112.3(c)(1) - retirement benefits qualify for the § 612(c)(3)(i) exemption only if actually (not merely deemed) contributed by New York State
• N.Y. Const. art. XVI, § 5 - pensions are excluded from the general taxability of state and local salaries, wages, and compensation
• TSB-A-09(9)I - rollover of a New York State pension into an IRA; the portion of a later IRA distribution representing a return of the rollover principal is a nontaxable distribution
• TSB-A-09(7)I and TSB-A-02(5)I - additional prior advisory opinions applying the same rollover principle

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a15_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(3)I
Income Tax
May 12, 2015

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

PETITION NO. I130109A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTED REDACTED “Petitioner”. Petitioner asks about the personal income tax consequences
of a rollover in a direct trustee-to-trustee transfer from Petitioner's Internal Revenue Code §§ 401(a)
and 403(b) tax-deferred annuities with the State University of New York Optional Retirement Plans
(the “Existing Plans”) 1 to an IRA.
We conclude that because the Existing Plans were funded with contributions from the State
University of New York, which is a New York State public employer, distributions that are
attributable to a rollover contribution to the new IRA from the Existing Plans are not included in
New York taxable income pursuant to Tax Law § 612(c)(3)(i).
Facts
Petitioner is a retired employee of one of the colleges of the State University of New York.
Petitioner is the beneficiary of the Existing Plans by virtue of his employment with SUNY. The
Existing Plans are qualified plans characterized as tax-deferred annuities under §§ 401(a) and 403(b)
of the Internal Revenue Code. Petitioner desires to rollover the Existing Plans, which are currently
maintained by TIAA-CREF, to another financial institution that administers IRA accounts.
Analysis
An Internal Revenue Code § 403(b) plan, also known as a tax-sheltered annuity plan, is a
retirement plan for certain employees of public schools, employees of certain other tax-exempt
organizations and certain ministers. A § 403(b) plan allows employees to contribute some of their salary
to the plan. The employer may also contribute to the plan for the employee. An Internal Revenue Code §
401(a) plan is used primarily by government employers. A § 401(a) plan is typically a custom-designed
plan offered only to key employees as an added performance incentive. Both plans are intended to
provide retirement income for employees.
Article 16, § 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." Tax Law § 612 provides that the New York adjusted
gross income of a resident individual means the individual's federal adjusted gross income with the
modifications specified in § 612. Tax Law § 612(c)(3)(i) provides that, to the extent includible in
gross income for federal income tax purposes, pensions paid to officers and employees of New York
State, its subdivisions, and agencies will be subtracted from an individual's federal adjusted gross
income.
Section 112.3(c)(1) of the New York State Personal Income Tax Regulations
(“Regulations”) provides that retirement benefits paid to a public officer will qualify for the
1

Although the Petition originally referred only to a 403(b) plan, Petitioner subsequently confirmed via email that the
Existing Plans are §§ 403(b) and 401(a) plans.

-2-

TSB-A-15(3)I
Income Tax
May 12, 2015

exemption pursuant to Tax Law § 612(c)(3)(i) if the benefits relate to the services performed by the
public officer and all or a portion are actually contributed (rather than merely being deemed
contributed) by New York State. Tax Law § 612(c)(3-a) provides that, for pensions and annuities
that are not subject to the subtraction modifications provided by Tax Law § 612(c)(3), a taxpayer who
is at least 59 ½ may subtract from federal adjusted gross income up to $20,000 of any of those
pensions and annuities.

The Department has previously concluded that when a taxpayer rolls over his or her
New York State pension benefits to an IRA, the "amount received from the pension fund
represents a nontaxable distribution, and is not subject to New York personal income tax.”
See TSB-A-09(9)I. In that matter, it was concluded that any distributions from an IRA that
were funded with rollover contributions from a New York State pension will be exempt
pursuant to Tax Law § 612(c)(3)(i) to the extent that they represent a return of principal
attributable to the pension rollover. Any other amounts received will be subject to tax.
However, these distributions are eligible for the subtraction modification provided by Tax
Law § 612(c)(3-a). See also, TSB-A-09(7)I; TSB-A-02(5)I.
In this case, because the Existing Plans were funded with contributions from the
State University of New York, a New York State public employer, the portion of any
distribution that is attributable to the rollover contribution to the new IRA is not included
in New York taxable income pursuant to § 612(c)(3)(i). Therefore, when Petitioner
receives a distribution from the new IRA, the portion of the distribution that is a return of
the Existing Plans’ rolled over contribution will qualify for the income subtraction
modification determined according to the provisions of Tax Law § 612(c)(3)(i).

DATED: May 12, 2015

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy 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. The information provided in this document does not cover every situation and is
not intended to replace the law or change its meaning.