Can a New York resident who made post-tax contributions to a Keogh Plan years ago, and later rolled that account into an IRA, exclude the return of those already-taxed contributions from New York taxable income once required minimum distributions begin?

Plain-English summary

In 1998 and 1999, Petitioner was a self-employed New Jersey resident who contributed to a Keogh Plan, a qualified retirement plan under the Internal Revenue Code. New Jersey does not allow a deduction for Keogh contributions, so Petitioner reported those amounts as ordinary income on her New Jersey returns even though she deducted them on her federal returns - making them, in effect, post-tax contributions from a New Jersey standpoint. In 2002 she terminated the Keogh Plan and rolled the proceeds into an existing traditional IRA, then later became a full-time New York resident. After turning 70½ in 2013, she had to begin taking required minimum distributions from the IRA and could not find a way to deduct her old post-tax contributions from federal adjusted gross income when preparing her 2013 New York return.

The Department explained that New York taxable income starts from federal adjusted gross income, which itself starts from federal gross income under IRC §§ 61 and 62. IRA distributions are included in federal gross income under IRC § 408(d), and neither that section nor IRC § 72 (which governs IRA and annuity distributions generally) provides any deduction for the portion of a distribution traceable to contributions made with already-taxed dollars. The Roth IRA exclusion in IRC § 408A does not apply because Petitioner's account is a traditional IRA under IRC § 408, not a Roth IRA. In short, federal law offers no basis-recovery mechanism here, and Article 22 of the Tax Law likewise has no provision specifically allowing a New York resident to subtract post-tax retirement plan contributions from federal gross income in the year of distribution.

That did not end the analysis, though. New York Tax Law § 612(c)(3-a) allows a resident who has reached age 59½ to subtract from federal adjusted gross income the pensions and annuities they receive, up to $20,000 per year, and the statute expressly extends that term to include IRA distributions received by someone 59½ or older. Because Petitioner was over that age and receiving IRA distributions, the Department concluded she could subtract up to $20,000 of those distributions from her federal adjusted gross income when computing New York adjusted gross income. Any amount of her IRA distributions beyond what can be subtracted under Tax Law § 612 remains part of her New York adjusted gross income.

What this means for you

Residents with post-tax contributions to an out-of-state retirement plan

If you made contributions to a Keogh Plan, or a similar qualified plan, that were taxed by another state but deducted on your federal return, don't expect New York to let you recover that "post-tax" basis when the rolled-over account is later distributed - Article 22 has no mechanism for that. Instead, look to the ordinary pension and annuity subtraction.

Retirees taking IRA distributions after age 59½

Once you've reached 59½, Tax Law § 612(c)(3-a) lets you subtract up to $20,000 per year of pension and annuity income - including IRA distributions - from federal adjusted gross income for New York purposes. This applies regardless of whether the distribution traces back to post-tax contributions; it's a flat annual dollar cap, not a basis-recovery rule, so amounts above $20,000 remain taxable in New York.

Common questions

Q: Can Petitioner deduct her original post-tax Keogh contributions from federal gross income now that she's receiving IRA distributions?
A: No. Neither the IRC nor Article 22 of the Tax Law provides a mechanism to subtract post-tax contributions to a qualified retirement plan from federal gross income in the year of distribution.

Q: Does the Roth IRA exclusion help here?
A: No. IRC § 408A's exclusion applies only to Roth IRAs; Petitioner's account is a traditional IRA governed by IRC § 408, so that exclusion does not apply.

Q: Is there any New York relief available at all?
A: Yes. Tax Law § 612(c)(3-a) lets a resident age 59½ or older subtract up to $20,000 per year of pension and annuity income, which by statute includes IRA distributions, from federal adjusted gross income.

Q: What happens to the portion of the IRA distribution above $20,000?
A: It remains included in New York adjusted gross income, since only amounts properly subtracted under Tax Law § 612 are excluded.

Citations and references

• Tax Law § 611 - defines New York taxable income of a full-year resident
• Tax Law § 612(a) - New York adjusted gross income equals federal adjusted gross income as adjusted by Tax Law § 612 additions and subtractions
• Tax Law § 612(c)(3-a) - subtraction of up to $20,000 of pension and annuity income (including IRA distributions to those 59½ or older) from federal adjusted gross income
• IRC §§ 61, 62 - federal gross income and federal adjusted gross income
• IRC § 408(d) - amounts distributed from an individual retirement plan are included in gross income
• IRC § 408A - Roth IRA distribution exclusion, held inapplicable to Petitioner's traditional IRA
• TSB-A-10(6)I and TSB-A-02(5)I - prior advisory opinions cited on the New York adjusted gross income treatment of IRA distributions

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a15_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(2)I
Income Tax
March 23, 2015

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I140224A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTED “Petitioner”. Petitioner asks whether, for
purposes of determining New York taxable income, she may subtract from federal gross income
post-tax contributions she made to a Keogh Plan and subsequently rolled over to an Individual
Retirement Account from which she is now receiving required minimum distributions.
We conclude that Article 22 of the Tax Law contains no provision that specifically
permits a New York resident taxpayer to subtract post-tax contributions to a qualified retirement
plan from federal gross income in the year of distribution to determine New York taxable
income. However, the subtraction from federal adjusted gross income described under New York
Tax Law § 612(c)(3-a), which excludes distributions from qualified retirement plans not
exceeding $20,000 from New York taxable income, could apply under Petitioner’s facts.
Facts
In 1998 and 1999, Petitioner was a self-employed resident of New Jersey. During that
period, Petitioner made contributions to a Keogh Plan, a qualified retirement plan under the
Internal Revenue Code (IRC). Under New Jersey law, contributions to a Keogh Plan are not tax
deductible, but such contributions are deductible upon distribution. Petitioner reported the
amount of her contributions as ordinary income on her 1998 and 1999 New Jersey state income
tax returns and deducted the amount of the contributions on her federal income tax returns for
those years. For purposes of this advisory opinion, these amounts will be referred to as post-tax
contributions.
In 2002, Petitioner terminated the Keogh Plan and rolled over the proceeds into an
existing traditional individual retirement account (IRA). She subsequently became a full time
New York resident. After Petitioner turned 70½ in 2013, she was required to take minimum
distributions from the IRA. When the Petitioner began to prepare her 2013 New York resident
income tax return, she was unable to find a method for deducting the amount of her post-tax
contributions to the Keogh Plan from her federal adjusted income for purposes of determining
her New York taxable income. After referring to New York State Department of Taxation forms
and instructions, she requested an advisory opinion on the tax treatment of her post-tax
contributions that were rolled over to her IRA.

-2-

TSB-A-15(2)I
Income Tax
March 23, 2015

Analysis
New York taxable income of full-time residents is defined under Article 22 (Personal
Income Tax) of the Tax Law as “…New York adjusted gross income less New York deduction
and New York exemptions...”. Tax Law § 611. In turn, New York adjusted gross income is
defined as the taxpayer’s federal adjusted gross income as adjusted by additions and subtractions
under Tax Law § 612. Tax Law § 612(a).
Federal adjusted gross income is a taxpayer’s federal gross income as modified under the
Internal Revenue Code (IRC). Federal adjusted gross income is determined, in part, from “all
income from whatever source derived” less certain deductions. IRC §§ 61, 62. Federal gross
income includes distributions from individual retirement accounts under IRC § 408(d): “[e]xcept
as otherwise provided in this subsection, any amount paid or distributed out of an individual
retirement plan shall be included in gross income...”. IRC § 408(d). Neither IRC § 72 nor IRC
§ 408, which govern distributions from IRAs under the IRC, provides for a deduction from
federal gross income of IRA distributions funded with post-state tax dollars. IRC § 408A, which
covers Roth IRAs, provides for an exclusion of distributions from federal gross income, but is
inapplicable to IRAs governed by IRC § 408. Thus, the distributions from Petitioner’s IRA
would be included in federal adjusted gross income, which is the starting point for computing her
New York adjusted gross income.
New York Tax Law § 612(c)(3-a) allows a subtraction from federal gross income, for
purposes of calculation of New York adjusted gross income, of an amount not exceeding
$20,000 received from pensions and annuities by resident taxpayers who have attained the age of
59½: “…the term ‘pensions and annuities’ shall also include distributions received by an
individual who has attained the age of fifty-nine and one-half from an individual retirement
account....” In this case, Petitioner may subtract up to $20,000 in IRA distributions from her
federal adjusted gross income for purposes of determining her New York taxable income
pursuant to Tax Law § 612(c)(3-a). Any distributions from her IRA other than those amounts
that can be subtracted from federal adjusted gross income under Tax Law § 612 are properly
included in Petitioner’s New York adjusted gross income. See TSB-A-10(6)I; see also
TSB-A-02(5)I.

DATED: March 23, 2015

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy 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. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.