New York Advisory Opinion TSB-A-87 (9)I: Is a withdrawal by a NYC teacher, who is not retired and is under 59½, from a Tax Deferred Annuity Program account subject to New York personal income tax?

Plain-English summary

Leon Luxenberg, a New York City teacher who was not retired and was under 59½ years old, asked the Department whether amounts he withdrew from his Tax Deferred Annuity Program account - a salary-reduction annuity offered to NYC teachers under Education Law § 399-A and the New York City Teachers' Retirement System - were subject to New York personal income tax. He also asked whether the answer would differ for taxable years 1986 and 1987.

The Department ruled the withdrawal was taxable, and traced the analysis through the City's own Administrative Code rather than the state pension exclusion. Administrative Code § 13-561 generally exempts a "return of contributions" from state or municipal tax, and § 13-582(f) extends that exemption to the Tax Deferred Annuity Program's net contributions and benefits. But § 13-582(i)(4) carves that exemption back out for exactly this situation: it says the § 13-561 exemption does NOT apply when a participant withdraws all or part of the accumulations built up from tax deferred annuity net contributions. So the general "return of contributions" exemption simply doesn't reach a mid-career withdrawal like this one.

The Department also closed off the obvious alternative path: the separate state exclusion in Tax Law § 612(c)(3-a), which lets an individual 59½ or older exclude up to $20,000 of certain pensions and annuities from New York adjusted gross income, "does not by its very terms apply to the situation described by Petitioner" - both because Luxenberg was under 59½ and because the exclusion is not the provision that governs Tax Deferred Annuity Program withdrawals in the first place. With neither exemption available, the withdrawal was fully taxable, and the Department confirmed this result holds equally for 1986 and 1987.

What this means for you

NYC teachers considering an early withdrawal from a Tax Deferred Annuity Program account

If you withdraw funds from your Tax Deferred Annuity Program account before retiring and before turning 59½, expect the withdrawal to be subject to New York personal income tax. The city Administrative Code's general "return of contributions" tax exemption is specifically written to exclude this kind of withdrawal, so don't assume contributions come back out tax-free just because they went in as pre-tax salary reductions.

Educators and school-district benefits staff explaining TDA withdrawal tax treatment

When advising teachers on Tax Deferred Annuity Program distributions, distinguish a pre-retirement, under-59½ withdrawal (taxable, per this opinion) from a retirement-age distribution that might qualify for the separate section 612(c)(3-a) pension/annuity exclusion. The two exemption paths are governed by different provisions - one municipal, one state - and this opinion confirms neither one shields an early withdrawal.

Accountants advising on multi-year 403(b)-style annuity withdrawals

Because this ruling confirms the taxable result applies equally to 1986 and 1987 (i.e., it isn't a one-year quirk of the tax law), you can rely on the same reasoning for other years in that era absent an intervening law change - the underlying Administrative Code carve-out and section 612(c)(3-a)'s age/purpose limits are the controlling factors, not the specific tax year.

Common questions

Q: I'm a NYC teacher who withdrew money from my Tax Deferred Annuity Program account before retiring - is it taxable in New York?
A: Yes, if you are under 59½ and not retired. The Department ruled that Administrative Code § 13-582(i)(4) specifically excludes withdrawals of tax deferred annuity net contributions from the general "return of contributions" tax exemption, so the withdrawal is subject to New York personal income tax.

Q: Doesn't the $20,000 pension and annuity exclusion under Tax Law § 612(c)(3-a) cover this?
A: No. The Department found that section 612(c)(3-a) "does not by its very terms apply" to a pre-retirement, under-59½ withdrawal from a Tax Deferred Annuity Program account - that exclusion is a separate provision aimed at a different situation.

Q: Does the answer change between 1986 and 1987?
A: No. The Department explicitly stated the taxable result "is equally applicable to taxable years 1986 and 1987."

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a87_9i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (9) I
Income Tax
December 8, 1987

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I870908A

On September 8, 1987, a Petition for Advisory Opinion was received from Leon Luxenberg,
14 W. Merrick Road, Valley Stream, New York 11580.
The issue raised is the taxability for purposes of the personal income tax imposed under
Article 22 of the Tax Law of amounts withdrawn by a teacher from his tax deferred annuity.
Petitioner specifies that the tax deferred annuity at issue is one established under the Tax Deferred
Annuity Program of the New York City Teachers' Retirement System and that the teacher in question
is not retired and is under 59½ years of age. Additionally, Petitioner asked whether the answer
would be the same for taxable years 1986 and 1987.
To take advantage of the provisions of section 403(b) of the Internal Revenue Code providing
for taxation of beneficiaries under annuities purchased by educational institutions, authorization is
given under section 399-A of the Education Law for reduction of salaries of teachers in the City of
New York in order to purchase tax deferred annuities. The Tax Deferred Annuity Program of the
New York City Teachers' Retirement System, which implements this provision, is set out in section
13-582 of the Administrative Code of the City of New York.
Section 13-561 of the Administrative Code exempts from any state or municipal tax any
return of contributions to a person under the provisions of Chapter 4 of Title 13 of the
Administrative Code. Section 13-582(f) of the Administrative Code adopts the exemption provisions
of section 13-561 by reference and provides that the exemption shall apply to the tax-deferred
annuity net contributions and the benefits provided thereby except as otherwise specified in section
13-582. However, section 13-582(i)(4) of the Administrative Code provides the exemption provided
by section 13-561 for return of contributions shall not apply to withdrawal of tax deferred annuity
net contributions when a participant withdraws all or part of his accumulations in the annuity savings
fund and variable annuity savings fund arising from tax deferred annuity net contributions.
Additionally, it is noted that the provisions of Tax Law section 612(c)(3-a), which provides
an exemption from New York personal income tax for certain pensions and annuities, does not by
its very terms apply to the situation described by Petitioner.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-87 (9) I
Income Tax
December 8, 1987

Accordingly, it is determined that amounts withdrawn by a teacher who is not retired and
who is under 59½ years of age from a tax deferred annuity established under the Tax Deferred
Annuity Program of the New York City Teachers' Retirement System are subject to the personal
income tax imposed under Article 22 of the Tax Law. This result is equally applicable to taxable
years 1986 and 1987.

DATED: December 8, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.