If a New York City Police Department employee dies before collecting his pension and his surviving spouse rolls the full distribution into an IRA, is money later withdrawn from that IRA taxable as New York income?

Plain-English summary

Petitioner Marie Douglas's spouse had been employed by the New York City Police Department and had submitted his retirement papers, but he died before any pension payment was made to him. His entire pension benefit was instead distributed to Petitioner, who promptly rolled it into a new IRA rollover account. No other contributions or rollovers were ever made to that account; the only additions since the rollover have been the income earned on the principal. Petitioner asked whether a distribution from that IRA may be subtracted from federal adjusted gross income when computing New York adjusted gross income.

The Department concluded that Petitioner's spouse's NYPD pension benefit is exempt from New York personal income tax under Article 16, § 5 of the New York State Constitution, and, assuming Petitioner received the distribution as her spouse's beneficiary, that exemption is confirmed by Tax Law § 612(c)(3)(i) and 20 NYCRR 112.3(c)(1)(i)(a) - the latter expressly covering pensions and other retirement benefits paid to the beneficiary of a deceased public officer or employee. Relying on its own prior opinion in Joseph W. Martiney (TSB-H-80-(523)I), which addressed a similar rollover of a New York public pension into an IRA, the Department held that the portion of any distribution from Petitioner's rollover IRA that represents a return of the pension contribution that was rolled over remains a nontaxable, exempt amount and may be subtracted from federal adjusted gross income when computing Petitioner's New York adjusted gross income.

The balance of any IRA distribution - representing interest or any other gain earned in the account - is not covered by that pension exemption. However, unlike in Martiney, the Department noted that if Petitioner has reached age 59 1/2, that non-exempt balance may be combined with any other qualifying pension and annuity income and subtracted (up to a combined total of $20,000 per year) under Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2). Any amount above that $20,000 combined limit remains taxable and is not subtracted from federal adjusted gross income.

What this means for you

Surviving spouses/beneficiaries of NY public-employee pensions

If a New York public employee dies before collecting a pension and the full benefit is instead paid to you as beneficiary, that pension does not lose its New York tax exemption merely because you roll it into an IRA. When you later take distributions from that rollover IRA, the part of each distribution that represents a return of the rolled-over pension contribution stays exempt from New York tax under Tax Law § 612(c)(3)(i) and 20 NYCRR 112.3(c)(1)(i)(a).

Accountants tracing return-of-principal vs. earnings in a rollover IRA

Only the portion of an IRA distribution attributable to the original rolled-over pension contribution is exempt as a return of principal; interest and other gains earned in the account afterward are not covered by that exemption. You'll need to track the rolled-over contribution amount separately from subsequent earnings so each distribution can be split into its exempt and taxable components. For the taxable (earnings) component, check whether the beneficiary has reached age 59 1/2 - if so, that amount can be combined with any other qualifying pension and annuity income and subtracted up to a combined $20,000 per year under Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2), with any excess remaining taxable.

Common questions

Q: Does the pension lose its New York exemption because it was paid out and rolled into an IRA rather than received as ongoing pension payments?
A: No. Petitioner's spouse's NYPD pension benefit remains exempt from New York State personal income tax under Article 16, § 5 of the New York State Constitution, and, as paid to Petitioner as beneficiary, under Tax Law § 612(c)(3)(i) and 20 NYCRR 112.3(c)(1)(i)(a), which specifically covers benefits paid to the beneficiary of a deceased public officer or employee.

Q: Once the money is in the rollover IRA, is every future distribution from it exempt?
A: No. Only the portion of a distribution that represents a return of the pension contribution that was rolled over into the IRA is exempt. The balance of a distribution - representing interest or any other type of gain earned in the account - is not covered by that exemption.

Q: What happened to the non-exempt (earnings) portion of a distribution in this case?
A: If Petitioner has reached age 59 1/2, that portion may be added to any other pension and annuity income she has that meets the conditions of Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2), and the combined total - up to $20,000 - may be subtracted from federal adjusted gross income when computing her New York adjusted gross income. Any amount in excess of $20,000 would be subject to tax.

Q: What prior opinion did the Department rely on, and how is this case different from it?
A: The Department relied on Joseph W. Martiney (TSB-H-80-(523)I), which held that distributions from an IRA funded by a tax-free rollover of a New York public pension are a nontaxable return of principal to the extent they represent the rolled-over pension funds, with interest or other gain being taxable. Unlike Martiney, this opinion also addresses that the taxable earnings portion may qualify for the separate $20,000 pension and annuity subtraction under Tax Law § 612(c)(3-a) once the recipient reaches age 59 1/2.

Q: Does it matter that Petitioner received the pension as a beneficiary rather than as the retired employee herself?
A: No. 20 NYCRR 112.3(c)(1)(i)(a) provides that the pension exemption covers pensions and other retirement benefits paid to a public officer or employee, or to the beneficiary of a deceased public officer or employee, of New York State, its political subdivisions, or agencies. Because Petitioner's spouse died before collecting his pension and Petitioner received the benefit as his beneficiary, the exemption still applies.

Citations and references

• N.Y. Const. art. XVI, § 5 - excludes pensions from the general taxability of salaries, wages, and other compensation paid to state and local officers and employees
• Tax Law § 612(a) - defines New York adjusted gross income of a resident individual as federal adjusted gross income with certain modifications
• Tax Law § 612(c)(3)(i) and 20 NYCRR 112.3(c)(1)(i)(a) - subtraction modification for pensions paid to officers and employees of New York State, its subdivisions and agencies, including benefits paid to the beneficiary of a deceased public officer or employee
• Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2) - $20,000 pension and annuity income subtraction available to individuals age 59 1/2 or older whose pension/annuity income is not otherwise exempt under § 612(c)(3)
• TSB-H-80-(523)I, Joseph W. Martiney (Adv Op St Tax Commn, Nov. 24, 1980) - holds that IRA distributions funded by a rollover of a New York public pension are a nontaxable return of principal to the extent of the rolled-over amount, with interest or other gain being taxable

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a98_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(4)I
Income Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I980106A

On January 6, 1998, a Petition for Advisory Opinion was received from Marie
Douglas, 129 Bay Ave East, Hampton Bays, New York 11946.
The issue raised by Petitioner, Marie Douglas, is whether an IRA
(Individual Retirement Account) distribution may be subtracted from federal
adjusted gross income when computing New York adjusted gross income for personal
income tax purposes under Article 22 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner's spouse had been employed by the New York City Police
Department. He had submitted his retirement papers, but died before any payment
had been made to him. Distribution of his entire pension benefit was made to
Petitioner who promptly rolled it into a new IRA rollover account. No other
contributions or rollovers have ever been made to this account.
The only
additions to the account is the income earned on the principal for the account.
Article 16, section 5 of the New York State Constitution provides that "all
salaries, wages and other compensation, except pensions, paid to officers and
employees of the state and its subdivisions and agencies shall be subject to
taxation."
Section 612(a) of the Tax Law defines New York adjusted gross income of a
resident individual as the individual's federal adjusted gross income with
certain modifications.
Section 612(c)(3)(i) of the Tax Law and section
112.3(c)(1) of the Personal Income Tax Regulations contain a subtraction
modification for pensions to officers and employees of New York State, its
subdivisions and agencies, to the extent includible in gross income for federal
income tax purposes.
Section 112.3(c)(1)(i)( a) of the Personal Income Tax
Regulations provides that this includes pensions and other retirement benefits
(including, but not limited to, annuities, interest and lump sum payments) paid
to a public officer or public employee or the beneficiary of a deceased public
officer or deceased public employee of New York State, its political subdivisions
or agencies.
In Joseph W. Martiney, Adv Op St Tax Commn, November 24, 1980, TSB-H-80­
(523)I, it was held that the distributions from an IRA established by means of
a tax-free rollover of amounts received in the form of a pension from New York
State or a subdivision or agency thereof, represents a nontaxable return of
principal to the extent that the distribution represents a return of the pension
funds "rolled over" into the IRA. To the extent that the distribution represents
interest, or any other type of gain earned in the account, such portion would be
subject to tax.

-2­
TSB-A-98(4)I
Income Tax

Section 612(c)(3-a) of the Tax Law was added in 1981, applicable for
taxable years commencing on or after January 1, 1982. This section and section
112.3(c)(2) of the Personal Income Tax Regulations provide that pension and
annuity income not subject to the modification referred to section 612(c)(3) of
the Tax Law and section 112.3(c)(1) of the Personal Income Tax Regulations and
not in excess of $20,000, received by an individual may be subtracted in
determining New York adjusted gross income providing the following conditions are
met:
(a) the pension and annuity income must be included in federal
adjusted gross income;
(b) the pension and annuity income must be included in periodic
payments, except that distributions from an IRA or Keogh will
qualify for the pension and annuity income modification whether such
distributions are periodic payments or a lump sum distribution;
(c) the pension and annuity income must be attributable to personal
services performed by such individual, prior to such individual's
retirement from employment, which arises from either an employer­
employee relationship or from contributions to a retirement plan
which are tax deductible under the Internal Revenue Code (e.g., IRA
or Keogh); and
(d) such individual receiving the pension and annuity income must be
59 ½ years of age or over.
In this case, Petitioner's spouse's New York City pension benefit is exempt
from New York State personal income tax pursuant to section 5 of Article 16 of
the New York Constitution.
Assuming that Petitioner received her spouse's
pension benefit distribution as the beneficiary, the pension benefit is exempt
from New York State taxation pursuant to section 612(c)(3)(i) of the Tax Law and
section 112.3(c)(1)(i)(a) of the Personal Income Tax Regulations.
Like Martiney, supra, when Petitioner receives distributions from the
rollover IRA account, only a portion of the distribution is exempt. Assuming the
distributions Petitioner receives from the rollover IRA account are included in
her federal adjusted gross income, the portion of a distribution from the
rollover IRA account that represents the amount of the pension benefit that was
rolled over into the IRA (the contribution), is a return of the pension
contribution and is exempt for New York State purposes pursuant to section
612(c)(3)(i) of the Tax Law and section 112.3(c)(3)(i)(a) of the Personal Income
Tax Regulations. Such portion of the IRA distribution would be subtracted from
federal adjusted gross income when computing Petitioner's New York adjusted gross
income. However, unlike Martiney, supra, pursuant to section 612(c)(3-a) of the
Tax Law and section 112.3(c)(2) of the Personal Income Tax Regulations, the
balance of the distribution from the rollover IRA account that represents any
other amount in the rollover IRA account, including any other contributions or
interest or any other type of gain or income earned, may not be subject to tax.
If Petitioner has reached the age of 59 ½ years of age, such amount may be added
to Petitioner’s other pension and annuity income, if any, that meets the
conditions of section 612(c)(3-a) of the Tax Law and section 112.3(c)(2) of the

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TSB-A-98(4)I
Income Tax

Regulations for purposes of computing the $20,000 pension and annuity income
modification. The total, but not in excess of $20,000, would be allowed as a
subtraction from federal adjusted gross income when computing Petitioner's New
York adjusted gross income. Any excess would be subject to tax and would not be
allowed as a subtraction from federal adjusted gross income when computing
Petitioner's New York adjusted gross income.

DATED: March 24, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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