New York pension include exclusion for spousal IRA

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beyou
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New York pension include exclusion for spousal IRA

Post by beyou »

So NYS allows $20k/year/person (so in theory $40k for married couple) to distribution IRAs and other pension like income, tax free.

While this has been discussed before and pretty well documented on the NYS website, there is one detail I find hard to understand from their documentation.

https://www.tax.ny.gov/pdf/publications ... /pub36.pdf

Says you can withdraw tax-free 20k from IRA if the contributions in that IRA had been "attributable to compensation for personal services, but NOT payments payments derived from contributions made after you retired that are not attributable to compensation for personal services".

My spouse continues to work and will certainly fund her t-IRA while working (no 401k at her job), and clearly if she does a Roth conversion later,
she can do $20k/year without NY taxation. I OTOH retired, but could put $ in my own t-IRA too, spousal contributions. So I am left wondering if the fact we have income from personal services on our joint tax return is sufficient to pass this test and get the state tax-free Roth conversion later ? Seems the conservative thing to do is to say my contributions are NOT compensation for personal services and subject to the NYS state.

I am also considering keeping a separate rollover t-IRA when I eventually roll my 401k to an IRA, both to maintain separate records of my contributions that are indeed related to personal services pre-retirement, and also to maintain the asset protection that is slightly greater for rollovers of 401k money vs other IRAs. I have not rolled over my employer 401k yet due to 1) rule of 55 and 2) asset protection of 401k, but eventually want to consolidate to same broker and fund choices as other investments (and there is another NYS property tax benefit that applies only to IRA not 401k). My more immediate issue is my near term contributions due to spousal IRA and how they will be treated when converted in the near future, at least for the non-working spouse.

Anyone already research this and contact NYS ? I haven't done so yet, mainly because the Roth conversion is a couple years away (post spouse's retirement which is TBD). For now I still think it a no-brainer for us to max our tax deferral in a t-IRA (severance payments post-retirement keep my income high for this year, and not eligible for direct to Roth contributions yet). But when spouse retires (likely post 59.5) I think my 20k/year must be taken from 401k and not my post retirement spousal IRA. Will call NYS when the time comes since I will make the contributions regardless this year.

PS asset protection comment is based on this :
https://www.retirementwatch.com/asset-p ... n-for-iras
homebuyer6426
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Re: New York pension include exclusion for spousal IRA

Post by homebuyer6426 »

It's a complicated enough situation that I would call them. I am also in the NYS pension plan.
Alan S.
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Re: New York pension include exclusion for spousal IRA

Post by Alan S. »

Not sure you can get a clear answer from the state, but this long standing exclusion for contributions not attributable to personal services does seem targeted toward spousal IRA contributions and QDRO or divorce settlements.

Another question regarding this exclusion involves how NYS would allocate such contributions to a 20k distribution and how gains on such contributions would be apportioned. If you have a 500k IRA of which 30k is attributed to spousal contributions, would the state use a pro rated calculation under which the 20k limit was reduced by 6%? Reduction of the exclusion limit makes sense, but not reducing the distribution amount. A similar issue is IRA basis in fully eligible IRAs. In that case, to take advantage of the 20k exclusion, the distribution should be grossed up so that the taxable amount is 20k.

My guess is that this limitation is not well understood, and neither taxpayers nor NYS track the composition of the IRA contributions. If you use a professional preparer, you might ask them what they might have seen from the state regarding these issues.
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beyou
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Re: New York pension include exclusion for spousal IRA

Post by beyou »

Alan S. wrote: Thu Aug 04, 2022 12:15 pm Not sure you can get a clear answer from the state, but this long standing exclusion for contributions not attributable to personal services does seem targeted toward spousal IRA contributions and QDRO or divorce settlements.

Another question regarding this exclusion involves how NYS would allocate such contributions to a 20k distribution and how gains on such contributions would be apportioned. If you have a 500k IRA of which 30k is attributed to spousal contributions, would the state use a pro rated calculation under which the 20k limit was reduced by 6%? Reduction of the exclusion limit makes sense, but not reducing the distribution amount. A similar issue is IRA basis in fully eligible IRAs. In that case, to take advantage of the 20k exclusion, the distribution should be grossed up so that the taxable amount is 20k.

My guess is that this limitation is not well understood, and neither taxpayers nor NYS track the composition of the IRA contributions. If you use a professional preparer, you might ask them what they might have seen from the state regarding these issues.
At least in my simple scenario, I have a T-IRA the has zero balance, already converted to Roth, to which I will add spousal contributions only at this point.
Then if/when I roll over my 401k, I will open a new "rollover IRA" which would only contain $ earned from my own personal services pre-retirement.
The only question is if I convert the spousal contribution account once we are both retired, if that gets taxed by NYS or not (for me, for spouse certainly it would not be taxed since she is in fact working and her only balance will also be from a starting balance of zero after prior Roth conversions). I basically used the t-IRA in the past only for backdoor and keep them empty, now will use for actual deductible contributions for the first time. But this issue of commingled sources is absolutely a complication without a documented methodology to follow, hence I will avoid by not commingling.
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Re: New York pension include exclusion for spousal IRA

Post by beyou »

homebuyer6426 wrote: Thu Aug 04, 2022 9:01 am It's a complicated enough situation that I would call them. I am also in the NYS pension plan.
Only complicated because they didn't bother to document the details of their vague policy.
I am willing to bet a random person answering the phone won't know, but if they can research and get back to me with something in writing,
I will share the results.
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dodecahedron
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Re: New York pension include exclusion for spousal IRA

Post by dodecahedron »

Alan S. wrote: Thu Aug 04, 2022 12:15 pm Not sure you can get a clear answer from the state, but this long standing exclusion for contributions not attributable to personal services does seem targeted toward spousal IRA contributions and QDRO or divorce settlements.
I believe you are not correct in your statement about the apparent targetting of the NY pension provision.

I believe the personal services eligibility provision is primarily directed to disqualify folks who get 1099-Rs for annuities they purchased (like SPIAs and DIAs) or cash value life insurance distributions that had nothing to do with an employee-employer relationship by anyone.

The provision for excluding nonpublic retirement distributions up to $20K from NY income tax was enacted in 1981. That predates both spousal IRAs (which started in 1986) and QDROs (which started in 1984.)

NYS is quite explicit in saying that beneficiaries of distributions from an inherited IRA or qualifying pension can claim the exclusion up to $20K if it results from the decedent's employment (rather than an annuity that the decedent purchased.)

For example, my late husband would have been eligible for a small private pension from a company he worked for just over five years, if he had lived to 60. He didn't live that long but when he would have turned 60, I was automatically eligible to collect a survivor benefit pension on that account. The document I linked above clearly indicates that I qualify for the up to $20K exclusion on my survivor pension benefit, even though it is not based on *my* personal services. Information for NYS VITA volunteers has given a number of examples making this quite clear that spouse beneficiaries and child beneficiaries collecting decedent pension benefits qualify for the exclusion. (I will try to dig up a link to that document.)

It is true that QDROs are explicitly not eligible for the exclusion but spousal IRAs are not explicitly addressed in my link above. The VITA guidance may address it. I will try to dig it up.

Edited to add: I am not able to find VITA guidance explicitly addressing spousal IRAs. Also, note that you don't need a QDRO to split an IRA. On the other hand, apparently you CAN rollover your QDRO funds into your IRA.

What a mess. That might be why there is no explicit ruling on spousal IRA.

For most taxpayers I suspect there is no easy way to distinguish their spousal IRAs from their IRAs based on their own earned income since there is no explicit labeling on spousal IRAs and contributions over the years can be commingled. Obviously someone who never worked outside the home will have her IRAs entirely in spousal, but many people have IRAs where contributions were mostly based on their own earnings but have just a few years where they contributed based on their spouse's earnings (e.g., if they were just out of the labor force for a few years while their kids were young or if they retired before their spouse.)

After my husband died, I rolled *all* of his tax-deferred retirement accounts (401k and 403b plans from multiple employers and an SEP IRA and a tIRA) and also my own SEP-IRA, my own tIRA, and my own 403b from former employers into my 403b at my current part-time employer to simplify and consolidate. (A small part of my own tIRA was spousal, i.e., contributions made in years when I did not have sufficient earned income to max out contributions based on my own earnings. Most of my tIRA was not spousal.) I have not yet taken any distributions from that consolidated 403b account. And RMDs will not kick in until I stop working at the employer in whose 403b my tax-deferred funds are custodied. The notion that if and when I start distributing from that 403b (or from an IRA into which I may eventually roll it), I need to somehow prorate how much of it originated with contributions based on my earnings vs my husband's seems totally impractical, especially since the guidance quite explicitly tells me that anything stemming from his retirement accounts rolled into my accounts after his death DO qualify for the exclusion.
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dodecahedron
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Re: New York pension include exclusion for spousal IRA

Post by dodecahedron »

Aaahh! I just realized something. All my spousal IRAs were in Roth IRAs, so those spousal IRA funds were NOT rolled into my tax-deferred 403b and I don't need to worry about prorating the NYS exclusion! Yay!

But many people will have tIRAs with commingled spousal contributions.

And the OP's dilemma stems precisely from a desire to do a spousal tIRA contribution and then convert it while taking advantage of the NYS exclusion to make the Roth conversion free of NYS taxes.

Hmmm. My guess is that if the OP inquired, detailing all the specifics of the plan, including the backdoor aspect, NYS would not give a clear blessing to the plan. While the federal government has more or less said backdoor Roth IRAs are okay, I don't know that NY has explicitly given any guidance or go-ahead on backdoor Roths. (Also note that NY has decoupled its income tax rules from federal tax law changes from TCJA 2017 and later.)
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