Traditional IRA accountholders generally have to pay federal income tax on distributions they take after they retire. (Check out our IRA Center for much more information on how these investment vehicles work.) The state of New York has a state income tax, but residents benefit from an exemption on some of their retirement income that offers more favorable tax treatment than federal law. As a result, IRA distributions up to a certain amount don't get taxed for New York state income tax purposes.
Exemption for pension and annuity income
New York tax law offers residents who are age 59 1/2 or older an exclusion of up to $20,000 in pension and annuity income from their federal adjusted gross income for purposes of calculating their state income tax liability. The exclusion applies to money received after turning 59 1/2, so if you reached that age on a certain date in the middle of the current tax year, only your withdrawals after that date are eligible for the exclusion.
The definition of pension and annuity income includes a number of items. In addition to covering traditional monthly pension payments from private employers, the provision also applies to periodic and lump-sum payments from IRAs that are attributable to compensation for personal services. However, if the payments are derived from contributions that you made to your IRA after you retired that are not attributable to compensation for personal services, then that portion of the payment is not eligible for the $20,000 exclusion.
The $20,000 exclusion provision applies to the sum total of all pension and annuity income, so taxpayers won't necessarily be able to exclude the full $20,000 from IRA distributions. For instance, if you receive other eligible pension income, such as from a 401(k) or a traditional corporate pension, then those payments will reduce what's available to exclude from IRA distributions.
Planning for the exclusion
New York state residents should consider timing their IRA withdrawals to take advantage of the exclusion. Even if it means accelerating income into an earlier year for federal tax purposes, the savings on the state income tax level can more than outweigh any added cost on the federal side. Consulting with an accountant is always a smart move, but in general, the exclusion on IRAs from New York state income tax is a helpful benefit for older New Yorkers to take advantage of in their retirement years.
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