If a retired SUNY employee rolls their Optional Retirement Program pension into an IRA, are later distributions from that IRA exempt from New York income tax?

Plain-English summary

The Petitioner retired from the State University of New York (SUNY) and received a pension funded through the Optional Retirement Program (ORP), an employer-sponsored qualified pension plan. After beginning minimum distribution payments at age 70 ½, the Petitioner intended to transfer (roll over) the ORP pension accumulation into a new IRA, and asked whether later distributions from that IRA could be subtracted from federal adjusted gross income when computing New York adjusted gross income.

The Department explained that pensions paid to New York state and local government employees are exempt from personal income tax under Tax Law § 612(c)(3)(i), which implements the constitutional exemption in Article 16, § 5 of the New York Constitution. Because the ORP payments were attributable to the Petitioner's employment with SUNY, they were constitutionally exempt pension income. Relying on its earlier opinions in Albert Zelony, TSB-A-02(5)I, and Joseph W. Martiney, TSB-H-80-(523)I, the Department concluded that when such a pension is rolled over into an IRA, the portion of any later IRA distribution that represents a return of the rolled-over contribution remains a nontaxable return of principal, exempt under § 612(c)(3)(i).

However, any additional gain or income the IRA earns (or any additional, non-rollover contributions to it) is not attributable to the ORP and so is not covered by the constitutional pension exemption. That gain or income can still be subtracted in computing New York adjusted gross income, but only under the separate pension and annuity income exclusion in Tax Law § 612(c)(3-a), which caps the subtraction at $20,000.

To apply this split, the Department instructed the Petitioner to determine, for each distribution, the fraction of the distribution attributable to the rollover contribution - the numerator being the rollover contribution and the denominator the IRA's current value immediately before the distribution. That fraction of each distribution is exempt under § 612(c)(3)(i). The rollover contribution balance is then reduced by the amount deemed returned, and the reduced balance is used as the numerator for the same calculation in the following year.

What this means for you

Retired public employees rolling a pension into an IRA

If you roll over a New York state or local government pension (including a SUNY ORP pension) into an IRA, the part of each future IRA distribution that represents a return of that rollover contribution stays exempt from New York tax under Tax Law § 612(c)(3)(i) - the rollover does not convert exempt pension principal into taxable income. But once the money is inside the IRA, any gains, interest, or other income the IRA earns is no longer treated as pension income attributable to your former public employer, so it does not qualify for that same exemption.

Tracking the exempt and taxable portions each year

Each year you take a distribution, you must calculate what fraction of it is a return of the remaining rollover contribution (rollover contribution balance ÷ IRA value before the distribution) versus a return of earnings or other contributions. The exempt fraction reduces your rollover contribution balance going forward, so you need to recompute it annually. The taxable portion (earnings/other contributions) is not exempt under § 612(c)(3)(i), but it can be subtracted under the general $20,000 pension and annuity exclusion in Tax Law § 612(c)(3-a), combined with any other pension and annuity income you receive.

Common questions

Q: Does rolling a SUNY ORP pension into an IRA cause the Petitioner to lose the pension's tax exemption?
A: No, not entirely. The portion of each IRA distribution that represents a return of the rolled-over pension contribution remains exempt under Tax Law § 612(c)(3)(i) because it is still attributable to the Petitioner's SUNY employment.

Q: Are the earnings the IRA generates after the rollover also exempt?
A: No. Interest, gains, or other income earned inside the rollover IRA are not attributable to the ORP and so are not exempt under § 612(c)(3)(i). They may instead be subtracted only under the separate $20,000 pension and annuity exclusion in Tax Law § 612(c)(3-a).

Q: How does the Petitioner figure out how much of each distribution is exempt?
A: By multiplying the distribution by a fraction - the rollover contribution balance in the numerator and the IRA's value immediately before the distribution in the denominator. That fraction of the distribution is the exempt return of the rollover contribution.

Q: Does the rollover contribution balance stay the same every year?
A: No. Each year, the portion of a distribution treated as a return of the rollover contribution reduces that balance, so the following year's calculation must use the most recently updated balance as the numerator.

Citations and references

• Tax Law § 612(c)(3)(i) - subtraction modification exempting pensions of New York state and local government employees, to the extent attributable to that public employment
• Tax Law § 612(c)(3-a) - subtraction modification for pension and annuity income, capped at $20,000
• NY Constitution Article 16, § 5 - exempts pensions (as opposed to salaries and wages) paid to officers and employees of the state and its subdivisions and agencies
• Albert Zelony, TSB-A-02(5)I (July 24, 2002) - rollover of NY pension into an IRA: return-of-contribution portion of distributions is nontaxable, other amounts subject to the $20,000 subtraction
• Lawrence Faraone, TSB-A-09(9)I - cited as consistent authority
• Joseph W. Martiney, TSB-H-80-(523)I (November 24, 1980) - IRA funded by tax-free rollover of a NY government pension: distributions are a nontaxable return of principal to the extent they return the rolled-over funds

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a10_6i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(6)I
Income Tax
July 13, 2010

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

PETITION NO. I100504A

Petitioner name redacted (“Petitioner”) asks whether a distribution from an Individual Retirement
Account (IRA) established by means of a tax-free rollover of amounts received from the State University of
New York Optional Retirement Program may be subtracted from federal adjusted gross income when
computing New York adjusted gross income. We conclude that, because the retirement payments are
attributable to his employment with the State of New York, distributions from the IRA that represent a
return of the rollover amounts will be exempt from New York State taxation pursuant to section 612(c)(3)(i)
of the Tax Law. We further conclude that distributions in excess of the amounts rolled over into the IRA
may be subtracted in computing New York adjusted gross income, but only up to $20,000.
Facts
Petitioner is retired from the State University of New York (SUNY) and receives a pension that is
funded under the Optional Retirement Program (ORP). The ORP is an employer sponsored qualified
pension plan. All payments received from the ORP accumulation will be paid to him as a result of his
employment with SUNY. Petitioner began taking the minimum distribution payments from the ORP when
he reached 70 ½ years of age. Petitioner now intends to transfer the funds from his pension accumulation to
a new IRA.
Analysis
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.” Pensions paid to officers and employees of this state, its subdivisions and
agencies, to the extent includible in gross income for federal income tax purposes, are exempt from personal
income tax pursuant to section 612(c)(3)(i) of the Tax Law. In this case, distributions received by Petitioner
under the ORP constitute pension and other retirement benefits paid to a public employee that are
constitutionally exempt from taxation.
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
rollover IRA that represents a return of the pension contribution is not subject to New York personal income
tax. Any other amounts received other than a return of the pension contribution, including any other
contributions to the IRA account or any interest or other type of gain and income earned, could be subtracted
pursuant to Tax Law §612(c)(3-a) in computing New York adjusted gross income, but only up to $20,000.
(See also Lawrence Faraone, Adv Op Comm T&F, TSB-A-09(9)I)
Similarly, Joseph W. Martiney, Adv Op St. Tax Commn, November 24, 1980, TSB-H-80-(523)I,
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, represent a nontaxable return of
principal to the extent that the distributions represent a return of the pension funds “rolled over” into the IRA.

-2-

TSB-A-10(6)I
Income Tax
July 13, 2010

With respect to distributions of any gain or income earned from any rollover IRA account
established by Petitioner, since the earnings would not be attributable to the ORP, interest or any other type
of gain or income earned is not exempt from New York State taxation pursuant to Article 16, section 5 of the
New York State Constitution and section 612(c)(3)(i) of the Tax Law.
Therefore, when Petitioner receives a distribution from the IRA, Petitioner must determine the
portion of the distribution that is a return of the rollover contribution and the portion that is either a return of
other contributions or the gains or income 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 rollover contribution and the denominator of which
is the current value of the IRA before the distribution.
Further, the portion of the distribution that is deemed to be a return of the rollover contribution
reduces the balance of the rollover contribution in the IRA. In the next taxable year, when determining the
portion of a distribution that is a return of the rollover contribution to the IRA, Petitioner must use the most
recently computed balance of the rollover contribution in the numerator.
Accordingly, pursuant to Tax Law section 612(c)(3)(i), Petitioner is allowed to subtract from federal
adjusted gross income the portion of his rollover IRA distribution that is attributable to the ORP rollover
contribution, provided that the distribution amount is included in his 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 he may have,
exceeds the $20,000 subtraction modification provided for in Tax Law section 612(c)(3-a).

DATED: July 13, 2010

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.