After retiring from a New York job and moving out of state, is the investment income earned inside my IRA or employee savings plan still taxable by New York once I start taking distributions as a nonresident?

Plain-English summary

Petitioner, John E. Ormsby, worked in New York State until he retired in 1990. When he retired, he took his pension as a lump sum and rolled it into an IRA. He also had a separate employee savings plan that he had not yet withdrawn from. In June 1991 he moved out of New York and became a nonresident. Neither account received any contributions from him or his employer after his 1990 retirement, and he told the Department that neither account held any "New York source" investments - meaning the money inside them wasn't invested in things like New York real estate or New York businesses. He asked whether the investment income earned inside these accounts while he was a nonresident was still taxable by New York.

The Department said yes, to the extent his original contributions to the IRA are attributable to services he performed in New York. Tax Law § 631(a) and § 631(b) source a nonresident's income to New York only if it is connected with a business, trade, profession or occupation carried on in the state. Because contributions to an IRA under IRC § 219 are only allowed in the first place because the taxpayer had qualifying employment, the Department's earlier opinion in Robert Vincent Smith, TSB-A-86(3)I, already established that IRA distributions are treated as derived from or connected with the job that generated the contributions - meaning the distribution is sourced to wherever that employment took place, not to wherever the IRA's assets happen to be invested today.

The Department also pointed to its earlier opinion in Richard W. Kaszubinski, TSB-A-84(1)I, where an IRA was invested entirely in New York and Puerto Rico municipal bonds - interest that is normally exempt from federal tax under IRC § 103. Even there, once that interest was distributed from the IRA, it lost its tax-exempt character and became ordinary taxable income, because federal law (which New York's § 607 conformity provision borrows for undefined Article 22 terms) treats an IRA distribution as one single category of income, not a pass-through of whatever the IRA happened to hold. Applying that logic here, Petitioner's statement that his accounts held no "New York source investments" was irrelevant - what matters is where the underlying employment was performed when the contributions went in, not what the money is invested in now.

The same rule carries over to the still-unwithdrawn employee savings plan. If Petitioner rolls it into an IRA, the identical analysis applies. If instead he elects to pay the separate federal lump-sum tax under IRC § 402(e) when he finally withdraws it, New York imposes its own parallel tax on lump sum distributions under Tax Law § 603, extended to nonresidents by § 637 (computed the same way as under § 624). Under 20 NYCRR § 142.1(a)(1), the ordinary income portion of that lump sum distribution is treated as wholly New York-source - with no split between his resident (pre-1991) and nonresident (post-1991) years - as long as the plan was established for an employee who performed services wholly within New York State.

What this means for you

Retirees who worked in New York and later moved out of state

Moving out of New York after your career here does not let you escape New York tax on your retirement account distributions. New York looks at where the underlying job was performed when the contributions were made, not where you live now or what the account is invested in today. Rolling a pension into an IRA, and later taking distributions as a nonresident, does not wash out the New York-source character of the money - and even switching the IRA's investments into something ordinarily tax-favored, like municipal bonds, doesn't help, because an IRA distribution is treated as one lump category of income once it comes out of the account. If you still have an uncashed employee savings plan, be aware that taking it as a lump sum (rather than rolling it into an IRA) can result in the entire ordinary income portion being taxed as New York-source, with no reduction for the years you no longer lived or worked in the state.

Accountants and tax professionals advising on retirement-account distributions after a residency change

When a client retires from New York employment, rolls a pension or savings plan into an IRA, and then moves out of state, you need to trace the New York-source share of the original contributions - not just look at the IRA's current investment mix. That New York-source percentage carries forward into every future distribution under Tax Law § 631(b), regardless of what the IRA is invested in at the time of distribution. If a client is instead weighing a lump sum election under IRC § 402(e) for an employee savings plan, remember that Tax Law § 603 and § 637, together with 20 NYCRR § 142.1(a)(1), can make the entire ordinary income portion New York-source with no apportionment between resident and nonresident years, if the plan was for services performed wholly within New York - which can make the IRA-rollover route more favorable for a client who worked mostly, but not entirely, in New York.

Common questions

Q: I rolled my New York pension into an IRA and now live out of state. Is the IRA still taxed by New York when I take distributions?
A: Yes, to the extent your contributions to the IRA are attributable to services you performed in New York. New York sources IRA distributions - including the investment earnings inside the account - to wherever the underlying employment was, under Tax Law § 631(b), following the Department's prior opinion in Robert Vincent Smith, TSB-A-86(3)I.

Q: My IRA doesn't hold any New York investments anymore - I moved the money into out-of-state stocks and bonds. Doesn't that matter?
A: No. The opinion is explicit that what the IRA is invested in today is irrelevant. What matters is where the employment was performed when the original contributions were made, not the current character of the account's assets.

Q: My IRA is invested in municipal bonds that are normally exempt from federal tax. Does that exemption carry over to my IRA distributions?
A: No. As the Department explained using its earlier Kaszubinski opinion (TSB-A-84(1)I), even municipal bond interest loses its tax-exempt character once it is distributed from an IRA. Federal law treats the entire IRA distribution as one type of income, and New York's Tax Law § 607 conformity provision follows that same treatment.

Q: I still haven't touched my old employee savings plan. What are my options, and do they matter for New York tax?
A: You can roll it into an IRA, in which case the same New York-source distribution rules described above apply. Or you can elect under IRC § 402(e) to pay a separate federal tax on the lump sum in the year of full withdrawal, in which case New York imposes its own separate lump sum tax under Tax Law § 603, extended to nonresidents by § 637.

Q: If I take my employee savings plan as a lump sum instead of rolling it into an IRA, is only the New York portion of my working years taxed?
A: Not necessarily. Under 20 NYCRR § 142.1(a)(1), if the plan was established for an employee who performed services wholly within New York State, the entire ordinary income portion of the lump sum distribution is treated as New York-source, with no apportionment between the years you were a New York resident and the years you were a nonresident.

Q: Why does New York treat IRA distributions this way instead of taxing only investments that are actually connected to New York?
A: Because IRA contributions under IRC § 219 are only permitted in connection with a taxpayer's employment, the Department treats the whole distribution - contributions plus any earnings - as connected to that employment under Tax Law § 631(b), rather than treating the IRA as a separate investment account whose New York tax treatment depends on what it currently holds.

Citations and references

• Tax Law § 631(a) and § 631(b) - New York sources a nonresident's income only if it is derived from or connected with a business, trade, profession or occupation carried on in New York
• Tax Law § 603 - separate tax on the ordinary income portion of a lump sum distribution for a taxpayer who elected lump sum treatment under IRC § 402(e)
• Tax Law § 637 - extends the § 603 tax to a nonresident's lump sum distribution that is wholly or partly New York-source, computed as under Tax Law § 624
• Tax Law § 607 - undefined Article 22 terms are given the same meaning as in comparable federal income tax law
• 20 NYCRR § 142.1(a)(1) - the ordinary income portion of a lump sum distribution is wholly New York-source if the plan was for an employee (or sole proprietor/partner) who performed services wholly within New York State
• IRC § 219 - IRA contributions are contingent on the taxpayer's employment, which is why IRA distributions are treated as connected to that employment
• IRC § 408(d) - amounts distributed from an IRA are included in gross income under IRC § 72
• IRC § 402(e) - election to pay a separate federal tax on a lump sum distribution
• IRC § 103 - interest on state and municipal bonds is ordinarily excluded from federal gross income, but loses that exclusion once distributed from an IRA
• Robert Vincent Smith, TSB-A-86(3)I (March 7, 1986) - IRA distributions are deemed derived from or connected with the business, trade, profession or occupation that generated the underlying contributions
• Richard W. Kaszubinski, TSB-A-84(1)I (April 16, 1984) - contributions to an IRA and income earned on them lose their individual character once withdrawn and become ordinary IRA distributions, even where the IRA was invested solely in New York/Puerto Rico municipal bonds

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a94_10i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-94 (10) I
Income Tax
July 14, 1994

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I940418B

On April 18, 1994, a Petition for Advisory Opinion was received from John
E. Ormsby, 65 Theresa Court, Toms River, New Jersey 08753.
The issue raised by Petitioner, John E. Ormsby, is whether investment
income earned while a nonresident in an IRA account and in an employee savings
plan account is taxable under Article 22 of the Tax Law.
Petitioner worked in New York State until his retirement in 1990. In June,
1991, Petitioner moved out of New York State and became a nonresident.
When Petitioner retired, he withdrew his pension in a lump sum and rolled
it into an IRA. Petitioner also has an employee savings plan. Petitioner has
not yet made any withdrawals, but when he does he can either roll that into an
IRA or choose to pay a separate tax on the lump sum in the year of full
withdrawal. There were no contributions to either plan by Petitioner or his
employer after his retirement in 1990.
Petitioner has no New York source investments in his IRA or employee
savings plan accounts.
Section 631(a) of the Tax Law provides, in part, that "It]he New York
source income of a nonresident individual shall be the sum of the net amount of
items of income, gain, loss and deduction entering into his federal adjusted
gross income ... derived from or connected with New York sources .... " Section
631(b) of the Tax Law provides, in part, that "[i]tems of income, gain, loss and
deduction derived from or connected with New York sources shall be those items
attributable to ... a business, trade, profession or occupation carried on in
this state .... "
Inasmuch as contributions to an IRA allowed by section 219 of the Internal
Revenue Code ("IRC") are contingent upon a taxpayer's employment in a business,
trade, profession or occupation, the distributions from an IRA are deemed for
purposes of section 631(b) of the Tax Law to be derived from or connected with
a business, trade, profession or occupation. Robert Vincent Smith, Adv Op St Tax
Comm, March 7, 1986, TSB-A-86(3)I.
Section 408(d) of the IRC provides, in part, that "any amount paid or
distributed out of an individual retirement plan shall be included in gross
income by the payee or distributee, as the case may be, in the manner provided
in section 72". Distributions are taxed in the year they are distributed. If an
individual withdraws an amount from an IRA and the individual had previously made
both deductible and nondeductible IRA contributions, the amount excludible from
income for the tax year is that portion of the amount withdrawn which bears the
same ratio as the individual's aggregate nondeductible IRA contributions bear to
TP-9 (9/88)

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TSB-A-94 (10) I
Income Tax
July 14, 1994

the aggregate balance on the last day of the taxable year of all IRAs of the
individual. See Internal Revenue Service Notice 87-16, 1987-1 CB 446.
Contributions to IRA's and income earned on such contributions lose their
individual character when withdrawn from the IRA and are, instead, simply
characterized as distributions from an IRA. Richard W. Kaszubinski, Adv Op St
Tax Comm, April 16, 1984, TSB-A-84(1)I. In Kaszubinski, the corpus of the IRA
account was invested solely in New York or Puerto Rico municipal bonds and
obligations. For Federal income tax purposes, where the funds contributed to an
IRA are invested in municipal bonds, the interest on which is ordinarily excluded
from gross income under section 103 of the IRC, such interest upon its exiting
the IRA loses its character as tax-exempt interest and takes its place, as
ordinary income, in Federal gross income and Federal adjusted gross income, and
is thus subject to Federal income tax.
That is, the IRC characterized the
distribution from the IRA as a species of income different from exempt municipal
bond interest, albeit without giving such income a distinct name. Section 607
of the Tax Law provides that terms used in Article 22 are to be given 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." Thus, for New York State personal income tax purposes and for Federal
income tax purposes, earnings from an IRA are treated in the same manner as the
contributions to such IRA. Accordingly, any reference in this advisory opinion
to distributions from an IRA is intended to include both contributions and income
earned on such contributions. Robert Vincent Smith, supra.
Accordingly, distributions from Petitioner's IRA while a nonresident are
included in Petitioner's Federal adjusted gross income and, pursuant to section
631(b) of the Tax Law, are included in Petitioner's New York adjusted gross
income as an item of income derived from or connected with New York sources to
the extent that Petitioner's contributions to the IRA are attributable to
services performed within New York State.
When Petitioner makes a full withdrawal from his employee savings plan
account, Petitioner can either roll it into an IRA or choose to pay a separate
tax on the lump sum distribution in the year of withdrawal. If Petitioner rolls
his employee savings plan account into an IRA, the IRA treatment described above
with respect to the pension rollover will also apply to the employee savings plan
account rollover. If Petitioner elects for Federal income tax purposes to pay
a separate tax on the lump sum distribution from the employee savings plan
account, Petitioner will pay a separate tax on the lump sum distribution for New
York State personal income tax purposes.
Section 603 of the Tax Law imposes, for each taxable year, a separate tax
on the ordinary income portion of a lump sum distribution of every individual
that has made an election of lump sum treatment under section 402(e) of the IRC.
Section 637 of the Tax Law provides that the tax imposed under section 603
of the Tax Law for any taxable year, with respect to the ordinary income portion
of a lump sum distribution received by a nonresident individual shall be
applicable to the ordinary income portion of a lump sum distribution wholly or
partly derived from or connected with New York sources and the amount of such tax
shall be computed in the same manner as that set forth in section 624 of the Tax
Law.

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TSB-A-94 (10) I
Income Tax
July 14, 1994

Section 142.1(a)(1) of the Personal Income Tax Regulations provides that
the ordinary income portion of a lump sum distribution is wholly derived from or
connected with New York State sources if the distribution is received by a
nonresident taxpayer from a qualified plan established for either a resident
individual or for a nonresident individual who performed services wholly within
New York State as an employee, a sole proprietor or a partner.
Accordingly, the lump sum distribution of Petitioner's employee savings
plan account would include the earnings from both Petitioner's resident and
nonresident periods. Like the distributions from an IRA, the taxation of
Petitioner's lump sum distribution under section 603 of the Tax Law is based on
Petitioner's services performed within New York State regardless of where
Petitioner resides and no distinction is made between the resident and
nonresident earnings in Petitioner's employee savings plan account. Pursuant to
section 637 of the Tax Law and section 142.1 of the Personal Income Tax
Regulations, the entire ordinary income portion of Petitioner's lump sum
distribution would be derived from or connected with New York State sources if
Petitioner performed services wholly within New York State as an employee, a sole
proprietor or a partner.

DATED: July 14, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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