New York Advisory Opinion TSB-A-86 (3)I: If a New York resident contributes to an IRA and later becomes a nonresident before withdrawing the funds, is the IRA distribution subject to New York personal income tax?

Plain-English summary

Robert Vincent Smith contributed to an Individual Retirement Account while a New York State resident, and asked what happens to those contributions (and the income they earned) for New York tax purposes if he later becomes a nonresident before withdrawing the funds. He also asked whether the earnings on his contributions would be taxable upon withdrawal.

The Department first noted a key characterization rule from its own earlier precedent (Matter of Kaszubinski): once withdrawn, IRA contributions and their earnings lose their separate individual character and are simply treated as "distributions from an IRA" - so contributions and earnings are analyzed together, not separately. Federal law (IRC § 408(d)) includes IRA distributions in gross income for the year received. For a nonresident, Tax Law § 632(a)-(b) reaches only items connected with New York sources, including income attributable to a business, trade, profession, or occupation carried on in New York - and since IRA contributions under IRC § 219 are contingent on the taxpayer's employment, IRA distributions are treated as connected to whatever employment generated the contributions. So a nonresident's IRA distribution is taxable in New York only to the extent it's attributable to services actually performed in New York.

The mechanics of that allocation come from 20 NYCRR 131.20 (the same regulation used for pensions and other retirement benefits that don't qualify as annuities): if the underlying services were performed wholly within New York, the full distribution is taxable; if wholly outside New York, none of it is; and if partly within and partly outside, the taxable portion is generally based on the proportion of compensation earned in New York versus everywhere else during a period covering the portion of the taxable year before retirement plus the three preceding taxable years - though a taxpayer can use a longer period if they can substantiate their New York versus non-New York compensation for that longer period to the Tax Commission's satisfaction. The Department also confirmed that IRA distributions don't qualify as "annuities" under a separate provision (20 NYCRR 131.4(d)), so the pension-allocation regulation, not the annuity rules, controls here.

Finally, the Department addressed the separate $20,000 pension/annuity exclusion under section 612(c)(3-a), which under section 632(a)(2) is available to nonresidents and does cover IRA distributions for someone 59½ or older - but if the underlying IRA income itself is allocated between New York and non-New York sources, the exclusion must be allocated on that same basis too, rather than applied in full against the New York-source portion alone.

What this means for you

New York residents who plan to relocate before withdrawing IRA funds

Moving out of New York before taking IRA distributions doesn't make the distribution entirely tax-free in New York - but it also doesn't make it entirely taxable. The Department will look at where you actually performed the services connected to your IRA contributions and tax only the New York-source portion, generally based on a 4-year look-back period of your compensation.

Individuals over 59½ withdrawing IRA funds as a nonresident

You can still claim the $20,000 section 612(c)(3-a) exclusion even as a nonresident, but be aware it must be applied on the SAME allocated basis as your taxable IRA distribution - you can't apply the full $20,000 exclusion against just the New York-source portion if your distribution itself is only partly New York-source.

Accountants advising clients who split their career between New York and other states

When a former New York resident withdraws IRA funds as a nonresident, use 20 NYCRR 131.20's allocation method - generally the 4-year look-back based on New York versus total compensation - to determine the taxable New York portion, and apply the same proportion to any available age-59½ exclusion, rather than treating the exclusion and the underlying income as separate calculations.

Common questions

Q: I contributed to my IRA while a New York resident but now live elsewhere - is my IRA withdrawal taxable in New York?
A: Only partially, and only to the extent the distribution is attributable to services you performed within New York State. The taxable portion is determined under 20 NYCRR 131.20's allocation rules, generally based on your New York versus total compensation during a 4-year look-back period before retirement.

Q: Do IRA contributions and their investment earnings get taxed differently when withdrawn?
A: No. The Department's own precedent (Matter of Kaszubinski) holds that contributions and earnings lose their separate character once withdrawn and are simply treated together as "distributions from an IRA."

Q: Can I claim the $20,000 age-59½ pension exclusion on my IRA withdrawal as a nonresident?
A: Yes, the exclusion is available to nonresidents under section 632(a)(2). But if your IRA distribution itself is allocated between New York and non-New York sources, the exclusion must be prorated using that same allocation, not applied in full against just the New York portion.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a86_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (3) I
Income Tax
April 17, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I851022B

On October 22, 1985, a Petition for Advisory Opinion was received from Robert Vincent
Smith, 451 Winter Street, Ext., Troy, New York 12180.
The issue raised is whether contributions to an Individual Retirement Account (IRA) made
by a New York State resident will be subject to the personal income tax imposed under Article 22
of the Tax Law when withdrawn from the IRA if at the time of withdrawal the resident has changed
his status and become a nonresident. Additionally, Petitioner asks whether income earned on such
contributions will be taxable upon withdrawal.
Initially, it must be noted that contributions to IRA's and income earned on such contributions
lose their individual character when withdrawn from the IRA and are, instead, simply characterized
as distributions from an IRA. Richard W. Kaszubinski, State Tax Commission Advisory Opinion,
TSB-A-84-(1)-I. Thus, for New York State and for federal purposes, earnings from an IRA will be
treated in the same manner as the contributions to such IRA. Accordingly, any reference in this
advisory opinion to distributions from an IRA is intended to include both contributions and income
earned on such contributions.
Section 408(d) of the Internal Revenue Code provides in part, that "any amount paid or
distributed out of an individual retirement account.., shall be included in gross income by the payee
or distributee, as the case may be, for the taxable year in which the payment or distribution is
received."
Section 632(a) of the Tax Law provides, in part, that the "New York adjusted gross income
of a nonresident individual shall be the sum of the following: (i) The net amount of items of income,
gain, loss and deduction entering into his federal adjusted gross income.., derived from or connected
with New York sources .... " Section 632(b) of the Tax Law provides, in part, that "items of income,
gain, loss and deduction derived from or connected with New York sources shall be those items
attributable to: ...a business, trade or profession or occupation carried on in this state ....
Inasmuch as contributions to an IRA allowed by section 219 of the Internal Revenue Code
are contingent upon a taxpayer's employment in a business, trade, profession or occupation, the
distributions from an IRA are deemed for purposes of section 632(b) of the Tax Law to be derived
from or connected with a business, trade, profession or occupation.
Accordingly, distributions from the IRA of a nonresident will be subject to personal income
tax under Article 22 of the Tax Law, but only to the extent that they are attributable to services
performed within New York State. In this regard, regulation section 131.20 provides in part:

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-86 (3) I
Income Tax
April 17, 1986

131.20 Pensions and other retirement benefits. If a pension or other retirement benefit
does not qualify as an annuity under subdivision (d) of section 131.4 of this Part, and
is attributable to services performed wholly within New York State, the entire
amount included in the individual's Federal adjusted gross income is likewise
includible in his New York adjusted gross income. If the pension or other retirement
benefit is attributable to services performed wholly outside New York State, no part
of the amount received is includible in the individual's New York adjusted gross
income. Where the employee's services were performed partly within and partly
without New York State, the amount includible in the individual's New York
adjusted gross income is the proportion of the amount included in the individual's
Federal adjusted gross income which the total compensation, received from the
employer for the services performed in New York State during a period consisting
of the portion of the taxable year prior to retirement and the three taxable years
immediately preceding the retirement, bears to the total compensation received from
the employer during such period for services performed both within and without New
York State. For purposes of this section, the compensation for services performed
within New York State must be determined separately for each taxable year or
portion of a year in accordance with the applicable provisions of section 131.17,
131.18 or 131.19 of this Part. A determination of the portion of a pension or other
form of deferred compensation attributable to New York State on the basis of a
period of time greater than the period referred to above may be made if the individual
establishes, to the satisfaction of the Tax Commission, the amount of his total yearly
compensation for a longer period of time and the amount allocable to New York
State in each year in accordance with the applicable provisions of section 131.17
through 131.19 of this Part. 20 NYCRR 131.20.
Distributions from IRA's do not qualify as annuities under subdivision (d) of
section 131.4
Additionally, it should be noted that section 612(c)(3-a) of the Tax Law provides an
exclusion to reduce a taxpayers federal adjusted gross income by any amounts included in a
taxpayer's gross income for federal purposes which consists of distributions from an IRA provided
the taxpayer has attained the age of fifty-nine and one-half years. The amount of this exclusion may
not exceed $20,000 per year. Section 632(a)(2) provides that the exclusion allowed under section
612(c)(3-a) of the Tax Law is applicable to nonresidents. However, if IRA income is allocable as
provided above, then the exclusion must be allocated using the same allocation basis. Technical
Services Bureau Memorandum TSB-M-81-(19) Rev-I.

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TSB-A-86 (3) I
Income Tax
April 17, 1986

Accordingly, Petitioner is subject to tax on the portion of his IRA distribution which is
allocated to New York pursuant to the provisions of regulation section 131.20. However, if
Petitioner has attained the age of fifty-nine and one-half, he is allowed an exclusion equal to the
amount of his taxable IRA distribution up to a maximum of $20,000 per year but on an allocated
basis as provided above.

DATED: March 7, 1986

NOTE:

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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