403(b) => Roth IRA after age 59-1/2

Home Fairmark Forum Retirement Savings and Benefits 403(b) => Roth IRA after age 59-1/2

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  • #71276
    thales
    Participant

    I have 403(b) as a NY public employee (educator), a voluntary salary reduction tax deferral account. Am over age 59-1/2 but have not retired yet. If I rollover it to Roth IRA, will it be exempt from NY state and local taxes?

    A little background of my question: some years ago, I don’t remember where (could be from this forum or some other online source), I read that in order to be exempt from NY state/city taxes, the 403(b) withdrawal/rollover must be limited to no more than $20K/year and must be systematic withdrawal/rollover for at least 2 years. Sounds complicated–also I suppose that was for the scenario of post-retirement. Is that rule still there, and does it also apply to pre-retirement but after age 59-1/2?

    Also, same questions about 401(a) tax deferred account.

    Many thanks!

    #71278
    thales
    Participant

    I realize this is NY specific. I found the relevant document, NY tax Pub.36. Thanks for reading. Thanks for all the volunteer service helping us here in all the years!

    #71281
    Alan S.
    Participant

    See bottom of p 11 and page 12 of Pub 36 attached: https://www.tax.ny.gov/pdf/publications/income/pub36.pdf

    Looks like you are eligible for the complete subtraction for all NYS and city taxes for a distribution including Roth rollover. That’s much better than just 20,000.

    The question is whether you are allowed a distribution from the plan while still in service. That’s subject to the plan document after 59.5.

    • This reply was modified 1 month, 1 week ago by Alan S..
    #71283
    thales
    Participant

    Alan, thank you so much. First, yes, I was told by the plan rep that after 59.5 it can be withdrawn, as it is a voluntary salary reduction program.

    I’m glad you found this good news for me. Just to make sure:

    I was looking at a different paragraph than the one you are referring to. I was looking at p.13:

    Pension and annuity income exclusion
    If you were age 59½ or older for the entire tax year, you may exclude up to
    $20,000 of………

    What’s the difference between p.13 and p.11-12 that you were referring to, with regard to whom it applies to? Do the two exclude each other? Sounds like you are saying I belong to the p.11-12 thus not subject the $20,000 limit. When I saw p.13 most of the qualified pension item includes the word “periodic”, I thought my salary reduction (which are the contributions to my 403(b)) were made every pay period, so that counts as “periodic”.

    So who does the p.13 paragraph apply to?

    Hope you could clarify this for me. When I asked the plan rep, she had never heard of the $20,000 limit rule at all, so I’m not sure if she’s knowledgeable enough when she told me all will be exempt from state taxes.

    #71285
    Alan S.
    Participant

    As you can see on p 11, the 100% subtraction applies to govt employees from federal down to local. There are no age or form of distribution limits. The rep was not aware of the 20,000 limited subtraction because their participants would never use that limit because they already qualify for the full subtraction. In other words, the 20,000 limit and the restrictions that come with it are for everyone else who is not govt employee. If I recall correctly your NYS tax return has a different code to be entered for each type of subtraction, so be sure to use the correct one.

    P 12 of Pub 36 lists the major govt employers whose plans qualify for the full subtraction. If you also qualify for a defined benefit pension (to which you did not contribute), that income also qualifies for subtraction. However, if you have a 457b deferred comp plan, those benefits do not qualify for a full subtraction, but you could use the 20,000 exclusion just for that income. And your beneficiaries will qualify for the same exclusions that you would have when they inherit these plans.

    More NYS guidance here: https://www.tax.ny.gov/pdf/volunteer/ty2018/co-60.pdf

    #71286
    thales
    Participant

    Thank you, Alan, for the reply and for linking the Q&A, which I find very helpful. I should have mentioned I have both 401(a) and 403(b). 401(a) is employer sponsored Retirement Annuity (RA), withdrawable only after retirement, while 403(b) is Supplemental Retirement Annuinty (SRA) completely contributed by me (employee) from voluntary salary reduction, withdrawable after 59-1/2 even before retirement. After reading your explanations and the Q&A that you linked, it seems to me that the 401(a) gets full subtraction, but the 403(a) is still subject to the $20,000/year limit, according to the bottom of p.2 of the Q&A:

    Q: Do TIAA/CREF retirement payments attributable to a person’s employment in SUNY, CUNY, or the NYS Board of Education system qualify for full exclusion as a NYS pension?
    A: SUNY, CUNY, and NYS Board of Education employees who opted to join TIAA/CREF as part of the Optional Retirement Plan qualify to exclude their retirement annuity pension income that was contributed by the public employer.
    However, distributions from the following don’t qualify for full exclusion as a NYS pension since the
    contributions were made by the employee:

    TIAA/CREF Supplemental Retirement Annuities (SRA);
    403B plans;
    Group Supplemental Retirement Annuities (GSRA);
    • IRAs; or
    • Roth IRAs.
    These distributions would qualify for the $20,000 pension and annuity income exclusion under
    Tax Law section 612(c)(3-a).

    I think the bold faced part apply to my 403(b) (which is SRA or GSRA, and is also 403(b)). The SUNY/CUNY and TIAA/CREF apply to my case.

    Did I miss something, or did the plan rep miss something?

    #71288
    Alan S.
    Participant

    This is a matter of matching up the exact plan you are in with Pub 36 and the other link. I did not read the second link to completion, but still would not have known exactly what plans you have participated in. The second link is very specific, while Pub 36 has always generated several questions. The term “pension” is very broad and it is not always clear what plans are considered pensions in addition to traditional DB plans. You might have been in several different plans given the number of different plans available and career changes you might have made.

    Looks like 403b plans are not eligible for the full exclusion unless you happen to have been in the NYC Teachers Retirement 403b, which is an exception. Your 401a (also includes many types of plans) but if you did not contribute to it, it probably is eligible for the full exclusion.

    Any plans not eligible for the full subtraction, but meet the restrictions of the 20,000 subtraction are subject to the 20,000 total subtraction for all such plans. A spouse receiving such payments would qualify for their own 20,000 subtraction.

    Note that for plans not eligible for the full subtraction because you contributed to them should be only partially taxable when distributed, since you will not be double taxed on your already taxed contributions. As such there might be less to taxable income to subtract, making the 20,000 limit go further.

    #71290
    thales
    Participant

    Thank you, Alan. So I made another call to the plan, this time a different rep, who also had not heard of the $20k limit rule, and I had to read what the pubs. say. He says if that’s what the the doc says, then I may be right. I asked him to let me know if he gets a definitive answer, which I’m not sure he will.

    I just took a look at last year’s Form IT201 (NY income tax form), and indeed, there are two lines under “New York Subtractions” that correspond to exactly the two categories we were talking about:

    Line 26 “Pensions of NYS and local governments and the federal government”
    Line 29: “Pension and annuinty income exclusion”

    So my understanding is if it’s complete subtraction, I should fill line 26 the total amount (I guess this is when I retire and rollover the 401(a));
    if it’s subject to the $20k limit (403(b) as it seems now, I should fill out line 29 the amount $20k (if I rollover more than $20k).

    Seems this will be where the rollover enters the tax return and there is no extra dreaded form to fill. Hope so?

    Thanks again for your time and help.

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