If a retired New York public school teacher rolls over her IRC §403(b) tax-deferred annuity into an IRA, are the later IRA distributions subject to New York State personal income tax?

Plain-English summary

Petitioner was an elementary school teacher for the Elmont Free Union School District (EFUSD) in Nassau County who participated in an IRC § 403(b) tax-deferred annuity plan (TDA) through a salary reduction agreement authorized by Education Law § 3109. When she retired on July 1, 2007, the collective bargaining agreement between the Elmont Board of Education and the Elmont Elementary Teachers' Association required EFUSD to contribute the cash value of 40% of her accrued unused sick leave directly into the TDA - she was not permitted to take that amount as cash instead. She later rolled the TDA over, via a direct trustee-to-trustee transfer, into an IRA and asked whether New York would tax the resulting IRA distributions.

The Department concluded that because EFUSD, a New York public employer, actually contributed to the TDA (rather than merely being deemed to contribute), the TDA qualified as a pension or retirement benefit within the meaning of Tax Law § 612(c)(3)(i) and 20 NYCRR 112.3(c)(1). As a result, the portion of each IRA distribution that represents a return of the TDA rollover contribution is excluded from Petitioner's New York taxable income. However, any earnings on that rollover, or amounts attributable to other (non-TDA) contributions to the IRA, are not covered by that exclusion - though they may qualify for the separate $20,000 pension and annuity subtraction under Tax Law § 612(c)(3-a) once Petitioner reaches age 59 1/2.

The opinion sets out a formula for sorting the two types of money going forward: the exempt portion of a given year's distribution equals the distribution multiplied by a fraction - the TDA rollover balance over the IRA's total value immediately before the distribution. Whatever the distribution deems a return of the TDA contribution then reduces the TDA rollover balance used in that fraction the following year. The remainder (non-TDA return) is eligible for the $20,000 subtraction under § 612(c)(3-a), subject to the age-59 1/2 requirement and to being combined with any other pension/annuity income claiming that same cap.

Importantly, the file itself carries a notice - added by the Department - stating that "as of October 20, 2020, the conclusion in this Advisory Opinion is no longer accurate." The ruling text does not explain what changed or supply a corrected analysis, so this summary describes only the reasoning and conclusion as originally issued in 2009; it should not be relied upon as current law.

What this means for you

Retired public employees with 403(b)-to-IRA rollovers

If your 403(b)/TDA received actual (not just deemed) contributions from a New York State or local public employer, the portion of your IRA distributions that traces back to that rollover may be exempt from New York tax under Tax Law § 612(c)(3)(i) - but you must be able to track and prove the rollover balance separately from other IRA contributions and earnings, since only the traceable rollover principal gets the exclusion.

Accountants and tax professionals

This opinion illustrates the tracing methodology (a rollover-balance-to-total-IRA-value fraction, recalculated each year) that the Department expects taxpayers to use when an IRA commingles exempt public-pension rollover money with other contributions or earnings. Because the Department has flagged this specific opinion's conclusion as no longer accurate as of October 20, 2020, do not cite it for current-law positions without independently verifying the present state of the rule (for example, checking for a superseding TSB-M, opinion, or statutory change).

Common questions

Q: Why was the TDA treated as exempt from New York tax in the first place?
A: Because EFUSD, a New York public employer, was contractually required to make an actual employer contribution to the TDA (40% of accrued sick leave) that Petitioner could not take as cash instead - satisfying the "actually contributed to (rather than merely being deemed contributed to)" standard in 20 NYCRR 112.3(c)(1) for the Tax Law § 612(c)(3)(i) pension subtraction.

Q: Does that mean the entire IRA is tax-free?
A: No. Only the portion of each distribution traceable back to the TDA rollover contribution is exempt. Earnings on that rollover and any other (non-TDA) contributions to the IRA remain taxable, subject only to the separate $20,000 subtraction under Tax Law § 612(c)(3-a) for taxpayers age 59 1/2 or older.

Q: How does Petitioner figure out which part of a distribution is exempt?
A: By multiplying the distribution amount by a fraction: the TDA rollover contribution balance divided by the IRA's total value immediately before the distribution. The exempt-return portion then reduces the TDA rollover balance used in that same fraction for the following year's distribution.

Q: Is this ruling still good law?
A: No - the document itself states that as of October 20, 2020, its conclusion is no longer accurate. The ruling text does not identify what superseded it, so readers should independently confirm the current treatment of 403(b)/TDA-to-IRA rollovers from public employers before relying on this reasoning.

Q: Are there similar prior rulings the Department relied on?
A: Yes. The opinion cites New York State United Teachers Benefit Trust, TSB-A-05(3)I (actual vs. deemed contributions to a 403(b) plan); Albert Zelony, TSB-A-02(5)I (rollovers of NY pension benefits to an IRA are nontaxable distributions); and Lawrence Faraone, TSB-A-09(9)I (IRA distributions tracing to a NY pension rollover are exempt to the extent of return of principal).

Citations and references

• Tax Law § 612(c)(3)(i) - subtraction from federal adjusted gross income for pensions of New York public officers and employees
• Tax Law § 612(c)(3-a) - $20,000 subtraction for pension and annuity income not otherwise covered by § 612(c)(3), available at age 59 1/2 or older
• 20 NYCRR 112.3(c)(1) - standard for public officer retirement benefits to qualify for the § 612(c)(3)(i) subtraction (actual, not merely deemed, contributions)
• 20 NYCRR 112.3(c)(2) - computation of the $20,000 subtraction under § 612(c)(3-a)
• N.Y. Constitution, Article 16, § 5 - subjects public salaries, wages, and compensation (except pensions) to taxation
• Education Law § 3109 - authorizes salary reduction agreements for TDA participation
• New York State United Teachers Benefit Trust, TSB-A-05(3)I (April 27, 2005) - actual vs. deemed public contributions to a 403(b) plan
• Albert Zelony, TSB-A-02(5)I (July 24, 2002) - IRA distributions from a rolled-over NY pension are nontaxable
• Lawrence Faraone, TSB-A-09(9)I - IRA distributions tracing to a NY pension rollover exempt to the extent of principal

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a09_10i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(10)I
Income Tax
September 10, 2009

Office of Counsel
Advisory Opinion Unit

As of October 20, 2020, the conclusion in this Advisory Opinion is no longer accurate!
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I090724A

Petitioner name redacted, in a petition dated July 12, 2009, requests an advisory opinion regarding
the Personal Income Tax treatment of distributions from an Individual Retirement account (IRA) that was
funded with assets rolled over in a direct trustee-to-trustee transfer from Petitioner’s Internal Revenue Code §
403(b) tax-deferred annuity plan (TDA).
We conclude that because the TDA was funded with contributions from the Elmont Free Union
School District (EFUSD), which is a New York State public employer, distributions that are attributable to a
rollover contribution to the IRA from the TDA are not included in New York taxable income pursuant to
§612(c)(3)(i). However, any gain or income earned on the amount of the rollover is included in Petitioner’s
New York taxable income to the extent that it does not qualify for the $20,000 income subtraction under
Tax Law §612(c)(3-a).
Facts
Petitioner was an elementary school teacher with the EFUSD in Nassau County. As authorized by
Education Law § 3109, EFUSD offered its elementary school teachers the opportunity to enter into salary
reduction agreements for the purpose of participating in the TDA. It is presumed for purposes of this
Opinion that the TDA is a qualified plan under Internal Revenue Code § 403(b). During her tenure with the
EFUSD, Petitioner participated in the TDA. The TDA provided the employees with multiple investment
options, of which each participant had to select at least one.1 On July 1, 2007, Petitioner retired from her
teaching position with EFUSD. As required by Article XI, § 8 of the collective bargaining agreement
between the Elmont Board of Education and the Elmont Elementary Teachers’ Association (the Collective
Bargaining Agreement), at the time of her retirement, EFUSD contributed the cash value of 40% of
Petitioner’s accrued unused sick leave to the TDA.
Analysis
Pursuant to Education Law § 3109, an EFUSD elementary school teacher may agree to reduce his or
her annual salary to become a participant in the TDA sponsored by EFUSD. Contributions to a TDA are
excluded from gross income in the year of contribution, while distributions paid to the participant are
included in gross income in the year of distribution. (Internal Revenue Code § 403(b).) Further, Internal
Revenue Code § 403(b) provides that eligible rollover distributions from the TDA to an IRA are excluded
from gross income in the year of distribution.

1

The fact that a participant may have an account with more than one of the investment vehicles that participate in the
403(b) plan is of no consequence because all of the accounts are collectively part of the same 403(b) plan. Simply
because an employee has accounts with three different investment firms rather than with one investment firm does not
remove the plan from its status as a tax-exempt 403(b) plan.

-2­

TSB-A-09(10)I
Income Tax
September 10, 2009

Article 16, § 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 of the Tax Law provides that the New York adjusted gross income of a resident
individual means the individual’s federal adjusted gross income (FAGI) with the modifications specified in
§ 612. Tax Law § 612(c)(3)(i) provides that, to the extent includible in gross income for federal income tax
purposes, pensions paid to officers and employees of New York State, its subdivisions, and agencies will be
subtracted from an individual’s FAGI. Section 112.3(c)(1) of the New York State Personal Income Tax
Regulations (Regulations) provides that retirement benefits paid to a public officer will qualify for the
exemption pursuant to Tax Law § 612(c)(3)(i) if the benefits relate to the services performed by the public
officer “and all or a portion of which are actually contributed to (rather than merely being deemed
contributed to) by New York State.” Tax Law § 612(c)(3-a) provides that, for pensions and annuities that are
not subject to the subtraction modifications provided by Tax Law § 612(c)(3), a taxpayer who is at least 59 ½
may subtract from FAGI up to $20,000 of any of those pensions and annuities.
In New York State United Teachers Benefit Trust, Adv Op Comm T&F, April 27, 2005,
TSB-A-05(3)I, it was concluded that if a 403(b) plan receives actual, not merely deemed, contributions from
the State, its political subdivisions or agencies, or the federal government, then the 403(b) plan is a pension
or retirement benefit within the meaning of Tax Law § 612(c)(3) and Regulations 112.3(c)(1). In Albert
Zelony, Adv Op Comm T&F, July 24, 2002, TSB-A-02(5)I, it was concluded that when a taxpayer rolls over
his or her New York State pension benefits to an IRA, the amount received from the pension fund represents
a nontaxable distribution, and is not subject to New York personal income tax. In Lawrence Faraone, Adv
Op Comm T&F, TSB-A-09(9)I, it was concluded that any distributions from an IRA that was funded with
rollover contributions from a New York State pension will be exempt pursuant to Tax Law § 612(c)(3)(i) to
the extent that they represent a return of principal attributable to the pension rollover. Any other amounts
received will be subject to tax; however, these distributions are eligible for the subtraction modification
provided by Tax Law § 612(c)(3-a).
In this case, Petitioner participated in the EFUSD 403(b) plan through a salary reduction agreement.
Additionally, Article XI, § 8 of the Collective Bargaining Agreement required EFUSD to make an employer
contribution to the TDA in an amount equaling the cash value of 40% of Petitioner’s accrued sick leave to
the TDA when Petitioner retired. Article XI, § 1 of the Collective Bargaining Agreement specifically
provided that employees could not receive cash instead of the mandatory employer TDA contribution to the
TDA. Because Petitioner was not allowed to receive cash for the amounts contributed to the TDA and the
Collective Bargaining Agreement required the employer contribution, the TDA is exempt from tax pursuant
to Tax Law § 612(c)(3)(i) and Regulations 112.3(c)(1). Thus, the portion of the distributions that Petitioner
receives from the IRA that constitutes a return of the rollover contributions to the IRA from the TDA is
exempt from New York State taxation.
The portion of the distributions from the IRA that does not constitute a return of any rollover
contribution to the IRA from the TDA is not exempt from New York State taxation. This portion of the
distribution can consist of other contributions to the IRA, as well as earnings on the amount of the TDA
rollover and any other contributions. If Petitioner has reached the age of 59½, the balance of a distribution
that does not represent a return of the TDA rollover contribution may be subtracted in computing New York
adjusted gross income, but only up to $20,000. (Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2).) Any
excess would not be allowed as a subtraction from FAGI when computing Petitioner’s New York adjusted
gross income.

-3­

TSB-A-09(10)I
Income Tax
September 10, 2009

Therefore, when Petitioner receives a distribution from the IRA, Petitioner must determine the
portion of the distribution that is a return of the TDA rollover contribution and the portion that is either a
return of other contributions or the gains earned by the IRA. The amount that will qualify for the income
subtraction modification under Tax Law §612(c)(3)(i) is determined by multiplying the amount of the
distribution by a fraction, the numerator of which is the TDA rollover contribution and the denominator of
which is the current value of the IRA before the distribution.
The portion of the distribution that does not qualify for the subtraction modification under Tax Law
§612(c)(3)(i) may qualify for the $20,000 income subtraction under Tax Law § 612(c)(3-a). This amount is
determined by subtracting the amount that is the return of the TDA rollover contribution from the amount of
the distribution. The balance is eligible for the $20,000 deduction. Further, the portion of the distribution
that is deemed to be a return of the TDA rollover contribution reduces the balance of the TDA rollover
contribution in the IRA. In the next taxable year, when determining the portion of a distribution that is a
return of the TDA contribution to the IRA, Petitioner must use the most recently computed balance of the
TDA rollover contribution in the numerator.
Accordingly, pursuant to Tax Law §612(c)(3)(i), Petitioner is allowed to subtract from Petitioner’s
FAGI the portion of the distribution from the IRA that is attributable to Petitioner’s TDA rollover
contribution that is included in Petitioner’s FAGI. Further, if Petitioner has attained the age of 59½, any
distributions from the IRA that do not constitute a return of Petitioner’s TDA rollover contribution may be
subtracted from Petitioner’s FAGI to the extent that the distributions, when added to any other pension and
annuity income that is not subject to the modification provided by Tax Law §612(c)(3), do not exceed
$20,000 and were included in Petitioner’s FAGI.

DATED: September 10, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

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.