Are a retired federal employee's periodic (non-lump-sum) Thrift Savings Plan distributions exempt from New York State income tax?

Plain-English summary

A retired federal employee in the Federal Employees' Retirement System (FERS) asked whether his Thrift Savings Plan (TSP) distributions — taken as periodic payments rather than a lump sum — can be subtracted from his New York income. His TSP was funded on a pre-tax basis by both himself and the federal government, with no rollovers in from outside accounts.

The Office of Counsel concluded yes. New York gives a subtraction for "pensions to officers and employees of the United States" (Tax Law § 612(c)(3)(ii)), and the regulation expressly covers federal-employee benefits "including, but not limited to, annuities, interest, and lump sum payments" (20 NYCRR 112.3(c)(1)(i)(b)). A TSP is a qualified IRC § 401(a) plan, so its distributions — whether lump-sum or periodic — qualify for the subtraction to the extent they're in federal income. (This confirms, for non-lump-sum payouts, the same result reached for lump sums/rollovers in TSB-A-24(4)I and 24(10)I.)

What this means for you

Retired federal employees in New York

However you take your TSP money — a lump sum or regular periodic payments — it is generally exempt from New York income tax under the federal-pension subtraction.

Accountants and tax preparers

The payout form (periodic vs. lump sum) doesn't change the § 612(c)(3)(ii) result for a TSP kept in the plan. The trace-and-split rules only become relevant once TSP money is rolled into an IRA (see TSB-A-24(4)I / 24(10)I).

Common questions

Q: Does it matter that I take monthly payments instead of a lump sum?
A: No. Both qualify for the federal-employee pension subtraction.

Q: My TSP was funded by me and my federal agency. Does it still qualify?
A: Yes. Employee-plus-government-funded TSP distributions are covered.

Q: What if I roll the TSP into an IRA?
A: Then only the rolled-over amount stays exempt and later IRA gains don't (see TSB-A-24(4)I).

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); § 607
- 20 NYCRR 112.3(c)(1)(i)(b)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao.htm
• Opinion: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income/24-14i.htm
• Printer-friendly PDF: https://www.tax.ny.gov/pdf/advisory_opinions/income/a24-14i.pdf

Original ruling text

TSB-A-24(14)I
Income Tax
April 24, 2024

The Department of Taxation and Finance received a Petition for Advisory Opinion from [ REDACTED ] (“Petitioner”). Petitioner asks if distributions from Petitioner’s Federal Employees’ Retirement Thrift Savings Plan (“TSP”) attributable to contributions made by the Federal Government and Petitioner are allowed to be subtracted from federal adjusted gross income (“FAGI”) in determining New York adjusted gross income (“NYAGI”) under Tax Law § 612(c)(3)(ii) when Petitioner receives distributions, other than by a lump sum, from the TSP.

We conclude that Petitioner’s distributions, other than by a lump sum, from the TSP that were funded with contributions from Petitioner and the Federal Government qualify for the subtraction modification under Tax Law § 612(c)(3)(ii) to the extent the distributions are included in Petitioner’s FAGI.

Facts

Petitioner is a retired federal employee and 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 the TSP. The TSP, established by 5 USC § 8437, is a retirement savings and investment plan and is treated for tax purposes as a trust under Internal Revenue Code (“IRC”) § 401(a). The TSP is a defined contribution plan as defined in IRC § 414(i). Individual accounts are established for each participating employee. The account may include contributions made by the account owner, 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. During Petitioner’s employment, he participated in the TSP. Contributions were made to Petitioner’s TSP account by Petitioner and by the Federal Government, Petitioner’s employer. Petitioner made all contributions on a pre-tax basis. Petitioner did not transfer any funds from another retirement account to the TSP account.

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(a) would constitute a pension within the meaning of Tax Law § 612(c)(3) and (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, or any agency of the United States, 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 the TSP account relating to Petitioner’s employment with the Federal Government that were funded by contributions from Petitioner and the Federal Government 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 those distribution are included in Petitioner’s FAGI.

Dated: April 24, 2024

Brian McCann
Principal Attorney

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.