How do you calculate the portion of IRA withdrawals that is exempt from New York income tax when the IRA was funded solely with federal Thrift Savings Plan rollover funds?
Plain-English summary
A retired Navy (federal) employee funded an IRA solely with his federal Thrift Savings Plan (TSP) rollover and asked how to calculate the portion of future IRA withdrawals that is exempt from New York income tax.
The Office of Counsel concluded:
- The distribution is exempt under Tax Law § 612(c)(3)(ii) only to the extent it represents a return of the rolled-over TSP amount.
- Gains or income earned in the IRA after the rollover are not attributable to the TSP and don't get that subtraction; they may qualify for the $20,000 subtraction under § 612(c)(3-a).
- One acceptable method: multiply each distribution by a fraction - numerator = the TSP rollover contribution; denominator = the IRA's current value before the distribution. The result is the fully exempt amount, and it reduces the remaining TSP-rollover balance for allocating future distributions.
What this means for you
Retired federal employees with TSP-funded IRAs
Rolling your TSP into an IRA preserves the exemption, but only for the rolled-over money - not for the investment growth afterward. You'll need to track the rollover balance and apply a pro-rata fraction each time you withdraw.
Accountants and tax preparers
Use the rollover-over-current-value fraction to split each distribution into the fully exempt § 612(c)(3)(ii) piece and the rest (post-rollover gains), which competes for the single $20,000 § 612(c)(3-a) subtraction. Decrement the rollover basis as distributions occur.
Common questions
Q: Is my whole TSP-funded IRA exempt?
A: No. Only the rolled-over TSP amount. Post-rollover gains are not exempt under § 612(c)(3)(ii).
Q: How do I compute the exempt share?
A: Multiply the distribution by (TSP rollover contribution) / (IRA value before the distribution), then reduce the rollover balance by the exempt amount.
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)
- TSB-A-09(7)I; TSB-A-15(3)I; Matter of Kane (Tax Appeals Tribunal)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income-ao-2020.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a20-11i.pdf
Original ruling text
New York State Department of Taxation and Finance
Office of Counsel
TSB-A-20(11)I
Income Tax
October 27, 2020
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
The Department of Taxation and Finance received a Petition for Advisory Opinion from
[ REDACTED ]. [ REDACTED ], (“Petitioner”), asks how to calculate the portion of withdrawals
from his Individual Retirement Account (“IRA”) that is eligible to be subtracted from
federal adjusted gross income (“FAGI”) in determining New York adjusted gross income
(“NYAGI”) under Tax Law § 612(c)(3)(ii) where the IRA was funded solely and exclusively
with Federal Thrift Savings Plan (“TSP”) funds contributed by the Federal government and
Petitioner relating to Petitioner’s services as a federal employee.
We conclude that the distributions from Petitioner’s IRA that were funded with
contributions from Petitioner’s TSP account qualify for the subtraction modification under
Tax Law § 612(c)(3)(ii) to the extent that the distributions represent a return of the amount
rolled over. Other IRA and retirement plan distributions to Petitioner that do not qualify for
the exclusion under Tax Law § 612(c)(3)(ii) above may qualify for the $20,000 subtraction
modification under Tax Law § 612(c)(3-a) to the extent that the other IRA and retirement
account distributions are included in Petitioner’s federal adjusted gross income (“FAGI”)
and otherwise meet the requirements of Tax Law § 612(c)(3-a).
Facts
Petitioner was employed by the Navy and is a member of the Federal Employees’
Retirement Service (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. A TSP, established by 5 USC § 8437, is a retirement
savings and investment plan and is treated for tax purposes as a trust under IRC § 401(a). 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.
See 5 USC § 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. See TSB-A-15(6)I. During Petitioner’s
employment, contributions were made to Petitioner’s TSP account by Petitioner and
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Income Tax
October 27, 2020
Petitioner’s federal employer relating to his services with the Navy. No funds were
transferred from another governmental or nongovernmental retirement account to the TSP.
Petitioner has retired and has funded an IRA using the funds in his TSP account. In a future
taxable year, when petitioner is a New York resident 1, he plans on taking distributions from
the IRA.
Analysis
Tax Law § 612(c)(3)(ii) provides a subtraction modification for “pensions to officers and
employees of the United States of America … or any agency or instrumentality of any one of the
foregoing, to the extent includible in gross income for federal income tax purposes.” 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. 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).
Tax Regulation 20 NYCRR 112.3(c)(1)(i)(b) provides that pensions and other retirement
benefits (including but not limited to annuities, interest, and lump sum payments) paid to an
employee of the United States, including its agencies, that are included in FAGI, relate to
services performed as a public employee, and all or a portion of which are actually contributed
by the Federal government, shall be subtracted from FAGI in determining the NYAGI of a
resident individual. Accordingly, any distributions to Petitioner from his TSP account relating
to his employment at the Navy that were funded by contributions from Petitioner and the Navy
are attributable to Petitioner’s employment with the Federal government and will qualify for the
subtraction modification under Tax Law § 612(c)(3)(ii) to the extent the distributions are
included in Petitioner’s FAGI.
In this case, Petitioner funded an IRA exclusively with funds rolled over from his TSP
account. When Petitioner receives distributions from the rollover IRA, only the portion of the
distribution that represents the rollover contribution from the TSP will qualify for the
subtraction modification under Tax Law § 612(c)(3)(ii). See TSB-A-09(7)I; cf. Matter of
Kane, Tax Appeals Tribunal, December 21, 2016. Therefore, if this portion of the
distribution is included in Petitioner’s FAGI when Petitioner computes his NYAGI, it will
qualify for the income subtraction modification. However, distributions of any gain or
income earned from the rollover IRA will not be considered to be attributable to Petitioner’s
1
Petitioner presently resides in Maryland and plans on moving to New York in the future.
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Income Tax
October 27, 2020
TSP, and will not qualify for the subtraction modification under Tax Law § 612(c)(3)(ii). Id.
These latter distributions may be eligible for the $20,000 subtraction modification provided
by Tax Law § 612(c)(3-a) to the extent the other requirements of that provision are satisfied.
See TSB-A-09(7)I; TSB-A-02(5)I.
One acceptable method of determining the portion of a distribution that is a return of
the rollover contribution from the TSP and allowed to be subtracted from petitioner’s FAGI
in determining NYAGI is to multiply the amount of the distribution by a fraction. The
numerator of the fraction is the TSP rollover contribution and the denominator of the fraction
is the current value of the IRA before the distribution. The product is the amount that will
qualify for the full subtraction modification under Tax Law § 612(c)(3)(ii). As discussed
above, the portion of the distribution that does not qualify for the subtraction modification
under Tax Law § 612(c)(3)(ii) may qualify for the $20,000 income subtraction modification
under Tax Law § 612(c)(3-a). Further, the portion of the distribution that is deemed to be a
return of the TSP rollover contribution reduces the balance of the TSP rollover contribution
in the IRA when Petitioner determines how to allocate any future distributions he receives.
See TSB-A-10(6)I; TSB-A-15(3)I.
DATED: October 27, 2020
/S/
DEBORAH R. LIEBMAN
Deputy Counsel
NOTE:
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.