If I roll over my Federal Reserve Bank of New York 401K Thrift Plan (which is exempt from New York tax) into an IRA, will distributions from the IRA still be exempt from New York personal income tax?

Plain-English summary

Petitioner, a 60-year-old retiree from the Federal Reserve Bank of New York (FRBNY), had participated in the FRBNY 401K Thrift Plan, a qualified plan whose distributions are exempt from New York taxable income under Tax Law § 612(c)(3)(ii) because FRBNY is treated as an instrumentality of the United States. She planned to roll the plan's funds over into a new IRA at another financial institution, funded exclusively by that rollover, and asked whether the IRA's later distributions would keep the same tax-free treatment.

The Department concluded the exemption carries over only in part. Drawing on two earlier advisory opinions - Charles E. Rockey, TSB-A-90(8)I (holding Federal Reserve pension payments exempt as payments to an employee of a federal instrumentality), and Albert Zelony, TSB-A-02(5)I (holding that a rolled-over New York State pension remains a nontaxable return of principal when later distributed from an IRA) - the Department reasoned that once Petitioner rolls her FRBNY 401K Thrift Plan into an IRA, only the portion of each later IRA distribution that represents a return of the original rollover contribution qualifies for the § 612(c)(3)(ii) subtraction.

Any gain or income the IRA earns after the rollover is not attributable to the FRBNY plan and is not exempt under § 612(c)(3)(ii). However, because Petitioner is over 59½, that earned portion may still qualify for the separate $20,000 pension and annuity income subtraction under Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2), combined with any other pension and annuity income she receives, up to the $20,000 cap. Amounts above that cap are fully taxable.

To split each future IRA distribution between the exempt rollover-principal portion and the taxable earnings portion, the opinion directs Petitioner to multiply the distribution by a fraction: the numerator is the FRBNY 401K Thrift Plan rollover contribution remaining in the IRA, and the denominator is the IRA's current value immediately before the distribution. The resulting amount qualifies for the § 612(c)(3)(ii) subtraction and also reduces the remaining rollover-contribution balance used in that fraction for future distributions.

What this means for you

If you are rolling over an exempt government pension or thrift plan into an IRA

Rolling exempt retirement funds into an IRA does not automatically make every later IRA distribution tax-free. Only the portion of each distribution that is a return of the original tax-exempt rollover contribution keeps its exemption; earnings and appreciation the IRA generates afterward become ordinary taxable New York income, subject only to the separate pension and annuity exclusion described below.

Tracking the exempt and taxable portions over time

Each time you take a distribution from the rollover IRA, calculate the exempt share by multiplying the distribution amount by a fraction - rollover contribution balance still in the IRA, divided by the IRA's value right before the distribution. Keep records of how this reduces the rollover balance, since it affects the fraction used for every subsequent distribution. If you are 59½ or older, remember that the taxable (earnings) portion, together with any other pension or annuity income, can still be reduced by up to $20,000 under Tax Law § 612(c)(3-a).

Common questions

Q: Does rolling over a tax-exempt 401K Thrift Plan into an IRA preserve the exemption for all future IRA distributions?
A: No. Only the part of each distribution that represents a return of the original rollover contribution stays exempt under Tax Law § 612(c)(3)(ii). Earnings the IRA generates after the rollover are taxable.

Q: How is the exempt portion of an IRA distribution calculated?
A: Multiply the distribution by a fraction whose numerator is the remaining FRBNY 401K Thrift Plan rollover contribution in the IRA and whose denominator is the IRA's value immediately before the distribution.

Q: Can the taxable earnings portion of an IRA distribution still get any exemption?
A: Yes, if the taxpayer is 59½ or older. Under Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2), up to $20,000 of that portion, combined with other pension and annuity income, can be subtracted from federal adjusted gross income; amounts above $20,000 are taxable.

Q: Why is the FRBNY 401K Thrift Plan exempt from New York tax in the first place?
A: Because the Federal Reserve Bank of New York is treated as an instrumentality of the United States, and Tax Law § 612(c)(3)(ii) exempts pensions paid to employees of the United States, its territories, the District of Columbia, or their instrumentalities, to the extent includible in federal gross income.

Citations and references

• Tax Law § 612(c)(3)(ii) - exempts pensions paid to officers and employees of the United States, its territories or possessions, the District of Columbia, or agencies/instrumentalities of the foregoing
• Tax Law § 612(c)(3-a) - allows taxpayers age 59½ or older to subtract up to $20,000 of pension and annuity income not otherwise exempt under § 612(c)(3)
• 20 NYCRR 112.3(c)(2) - regulation implementing the pension and annuity income subtraction
• Charles E. Rockey, Adv Op Comm T&F, June 1990, TSB-A-90(8)I - Federal Reserve pension payments are exempt as payments to an employee of a U.S. instrumentality
• Albert Zelony, Adv Op Comm T&F, July 24, 2002, TSB-A-02(5)I - a rolled-over New York State pension remains a nontaxable return of principal when later distributed from an IRA

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_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(7)I
Income Tax
July 13, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I081103B

In a Petition dated October 23, 2008, Petitioner, name redacted, asks whether, if she rolls over her
Federal Reserve Bank of New York 401K Thrift Plan, whose distributions are not included in determining
New York State taxable income, to an Individual Retirement Account (IRA), the subsequent distributions from
the IRA will continue to be excluded in determining her New York taxable income.
We conclude that distributions that are attributable to Petitioner’s FRBNY 401K Thrift Plan rollover
contribution to her IRA are not included in her New York taxable income pursuant to §612(c)(3)(ii). However,
any gain or income earned by the IRA rollover is included in Petitioner’s New York taxable income to the
extent it does not qualify for the $20,000 income subtraction under Tax Law §612(c)(3-a).
Facts
Petitioner is 60 years old and recently retired from the Federal Reserve Bank of New York (FRBNY).
Petitioner participated in the FRBNY 401K Thrift Plan, which is a qualified plan. Distributions from the
FRBNY 401K Thrift Plan are not included in New York taxable income pursuant to Tax Law § 612(c)(3)(ii).
Petitioner plans on rolling over the funds in the plan to a new IRA at another financial institution. The New IRA
will be funded exclusively by the rollover funds from the FRBNY 401K Thrift Plan.
Analysis
Section 612 of the Tax Law provides that the New York adjusted gross income of a resident individual
is the individual’s federal adjusted gross income with the modifications specified in § 612. Tax Law §
612(c)(3)(ii) provides that pensions paid to officers and employees of the United States of America, any territory
or possession or political subdivision of such territory or possession, the District of Columbia, or any agency or
instrumentality of any of the forgoing, to the extent includible in gross income for federal income tax purposes.
Pensions and annuities that are not subject to the subtraction modifications provided for by § 612(c)(3) will be
subtracted from federal adjusted gross income. Tax Law § 612(c)(3-a) provides that, for pensions and annuities
that are not subject to the subtraction modifications provided by § 612(c)(3), a taxpayer who is 59 ½ or older
may subtract from federal adjusted gross income up to $20,000 of any of those pensions or annuities.
In Charles E. Rockey, Adv Op Comm T&F, June 1990, TSB-A-90(8)I, it was concluded that pension
payments from the distributions from the Federal Reserve Retirement Plan administered by the Office of the
Federal Reserve Employee Benefit System and subject to the direction and control of the Board of Governors
and the federal reserve banks are pension payments paid to an employee of an instrumentality of the United
States and therefore are exempt from tax pursuant to § 612(c)(3)(ii) of the Tax Law. Further, Albert Zelony,
Adv Op Comm T&F, July 24, 2002, TSB-A-02(5)I, 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. Any subsequent distributions from the IRA
will be exempt to the extent that they represent a return of principal attributable to the pension rollover. Any
other amounts received will be subject to tax.
In this case, if Petitioner rolls over her FRBNY 401K Thrift Plan to an IRA, then as in Zelony, supra,
when Petitioner receives distributions from the rollover IRA, only a portion of the distribution will be exempt.
The portion of the distribution from the IRA that represents the rollover contribution from the FRBNY 401K

TSB-A-09(7)I
Income Tax
July13, 2009

-2­

Thrift Plan is a return of the FRBNY 401K Thrift Plan contribution. If this portion is included in Petitioner’s
federal adjusted gross income when the Petitioner computes her New York adjusted gross, it will qualify for the
income subtraction under Tax Law §612(c)(3)(ii).
With respect to distributions of any gain or income earned from the rollover IRA, the earnings are not
attributable to Petitioner’s retirement plan from FRBNY, and the interest or gain earned is not exempt from
New York State taxation. Since Petitioner has reached the age of 59½, the balance of the distributions that do
not represent a return of the FRBNY 401K Thrift Plan contribution in the rollover IRA may be subtracted in
computing New York adjusted gross income, but only up to $20,000. See Tax Law §612(c)(3-a) and 20 NYCRR
112.3(c)(2). Any amount of those contributions under $20,000 should be added to any other pension and
annuity income she may receive. The total, but not in excess of $20,000, would be allowed as a subtraction
modification from federal adjusted gross income when computing Petitioner’s New York adjusted gross income.
Any excess over $20,000 would not be allowed as a subtraction from federal adjusted gross income when
computing Petitioner’s New York adjusted gross income.
When Petitioner receives a distribution from her rollover IRA, she must determine the portion of the
distribution that is a return of the FRBNY 401K Thrift Plan contribution to the IRA and the portion that is
attributable to any other contribution or to appreciation (if any) since the original rollover. These portions can
be determined by multiplying the amount of the distribution by a fraction, the numerator of which is the FRBNY
401K Thrift Plan rollover contribution, and the denominator of which is the current value of the IRA before the
distribution. The product is the amount that will qualify for the income subtraction modification under Tax Law
§612(c)(3)(ii). As discussed above, the portion that does not qualify for the subtraction modification under Tax
Law §612(c)(3)(ii) may qualify for the $20,000 income subtraction under Tax Law § 612(c)(3-a). Further, the
portion that is deemed to be a return of the FRBNY 401K Thrift Plan rollover contribution reduces the balance
of the FRBNY 401K Thrift Plan rollover contribution in the IRA when Petitioner determines how to allocate
any future distributions she receives.
Accordingly, pursuant to Tax Law §612(c)(3)(ii), Petitioner is allowed to subtract from federal adjusted
gross income the portion of her rollover IRA distribution that is attributable to her FRBNY 401K Thrift Plan
rollover contribution, provided that the distribution amount is included in her federal adjusted gross income.
Further, any gain or income earned from the rollover IRA is included in determining Petitioner’s New York
taxable income to the extent the gain or income, when added to any other pension and annuity income she may
have, exceeds the $20,000 subtraction modification provided for in Tax Law §612(c)(3-a).

DATED: July 13, 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.