Are a federal employee's Thrift Savings Plan distributions exempt from New York tax, including for a private IRA she rolled into the TSP, and can she also use the $20,000 subtraction?
Plain-English summary
An IRS employee (Federal Employees' Retirement System) had a Thrift Savings Plan (TSP) funded by her and the federal government - plus a private-sector IRA she rolled into the TSP (about 80% federal, 20% private). She asked whether her TSP distributions are exempt from New York tax and whether she could also withdraw an extra $20,000 tax-free.
The Office of Counsel concluded:
- The distributions attributable to her federal employment - her and her employer's contributions and the earnings on them - are exempt under Tax Law § 612(c)(3)(ii) (federal-employee pensions), if included in federal adjusted gross income.
- The portion attributable to the rolled-in private-sector IRA is not exempt under that section (it wasn't related to federal service or contributed by the federal employer), but may qualify for the $20,000 subtraction under § 612(c)(3-a).
What this means for you
Federal employees who rolled private retirement money into a TSP
Your TSP keeps a full New York exemption for the federal-service piece, including its investment earnings - but money you rolled in from private-sector accounts doesn't get that exemption. It falls under the capped $20,000 subtraction instead.
Accountants and tax preparers
This foundational TSP opinion is cited throughout later rulings (e.g., TSB-A-17(1)I, 20(11)I). Split TSP distributions into the exempt federal piece (§ 612(c)(3)(ii), uncapped, including earnings) and the rolled-in private piece (§ 612(c)(3-a), capped at $20,000).
Common questions
Q: Are the earnings on my federal TSP contributions exempt too?
A: Yes - the exempt amount includes the accumulated earnings on the federal contributions.
Q: What about the private IRA I rolled into the TSP?
A: That portion isn't exempt under the federal-pension rule, but may use the $20,000 subtraction under § 612(c)(3-a).
Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.
Citations and references
Statutes and regulations:
- Tax Law §§ 612(c)(3)(ii), 612(c)(3-a), 607
- 20 NYCRR 112.3(c)(1)(i)(b); 5 USC § 8437; IRC §§ 401(a), 401(k)
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_6i.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-15(6)I
Income Tax
July 15, 2015
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. I140527B
The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTED “Petitioner”. Petitioner asks
whether distributions to her from her Federal Thrift Savings Plan (TSP) account will be exempt
from New York State income tax, and, if so, will she also be entitled to withdraw an additional
$20,000 tax free from an IRA or other retirement account.
We conclude that distributions that are attributable to contributions made by Petitioner
and her employer to her TSP account while she was a Federal employee, including the
accumulated earnings from those contributions, will be exempt from New York State income
tax, if the amounts are included in Petitioner’s Federal adjusted gross income (FAGI). The
distributions that are attributable to a rollover IRA account established by Petitioner while she
was employed in the private sector, including the accumulated earnings, may be excluded in an
amount not to exceed $20,000, if Petitioner meets all the requirements in Tax Law §612(c)(3-a).
Facts
Petitioner is employed by the Internal Revenue Service (IRS) and is a member of the
Federal Employees’ Retirement System (FERS). FERS is a 3-part retirement package available
to Federal employees under which the employees are eligible after retirement for a basic annuity,
Social Security, and distributions from a TSP. The TSP, established by § 8437 of Title 5 of the
United States Code (USC), is a retirement savings and investment plan. As a defined
contribution plan, the TSP offers the same types of savings and benefits to Federal employees
that many private corporations offer their employees under IRC § 401(k) plans, and it is treated
for tax purposes as a trust under IRC § 401(a). See USC Title 5, § 8440. The account may
include contributions made by the account owner and the account owner’s Federal employer and
the earnings associated with those contributions, as well as funds transferred to the TSP account
from an account owner’s nongovernmental retirement account and its associated earnings.
Petitioner is planning to retire from the IRS in 2015 after 24 years of employment. She
will be over 60 years old at that time. When she retires, Petitioner will receive a pension from
the FERS. She also plans to withdraw approximately $30,000 a year from her TSP account.
Prior to joining the IRS, Petitioner had a career in the private sector. During that time,
she created an IRA. In 2010, Petitioner rolled over this IRA to her TSP account. At that point,
80% of the value of her TSP account was derived from contributions made while she was a
Federal employee, and 20% was derived from the rolled over IRA. Petitioner plans to withdraw
20% of her TSP account prior to her retirement and deposit the money in a brokerage account.
Analysis
-2-
TSB-A-15(6)I
Income Tax
July 15, 2015
Generally, Federal pensions earned by officers and employees of the United States or its
instrumentalities are not subject to income tax by New York State, to the extent they are
includible in FAGI. See Tax Law § 612(c)(3)(ii). Pensions and annuities that are included in
FAGI but are not excluded from New York State income tax pursuant to § 612(c)(3)(ii) may
qualify for an exclusion, not exceeding $20,000, under Tax Law § 612(c)(3-a), if all the statutory
requirements are met.
The term “pension” is not defined in Article 22 of the Tax Law. However, Tax Law
§607 provides that any term used in Article 22 shall have the same meaning as when used in a
comparable context in the laws of the United States relating to federal income taxes, unless a
different meaning is clearly required. We have opined that payments paid from a qualified
pension plan within the meaning of IRC § 401 would constitute a “pension within the meaning of
Tax Law §§ 612(c)(3) and 612(c)(3-a).” See TSB-A-94(1)(I) and TSB-A-01(1)I. Regulation 20
NYCRR 112.3(c)(1)(i)(b) provides that retirement benefits (including but not limited to
annuities, interest, and lump sum payments) that are included in FAGI, that are related to
services performed as public officers or public employees, and all or a portion of which are
actually contributed by the Federal government, shall be subtracted from FAGI in determining
the New York adjusted gross income (NYAGI) of a resident individual. Thus, we conclude that
distributions to Petitioner from her TSP account that are attributable to Petitioner’s IRS wages or
contributions to her TSP account made by her Federal employer and paid to her after her
retirement, shall be subtracted from Petitioner’s NYAGI, to the extent that they are included in
Petitioner’s FAGI.
Distributions to Petitioner from Petitioner’s TSP account that are attributable to the
rollover IRA established while the Petitioner was employed in the private sector will not be
eligible for an exclusion under Tax Law § 612(c)(3)(ii), because the contributions to that account
were not related to services Petitioner performed as a Federal employee and none were
contributed by her Federal employer. However, these distributions may be eligible for an
exclusion, not in excess of $20,000, under Tax Law § 612(c)(3-a), provided that all the
requirements of that section are met.
DATED: July 15, 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.