Stashing cash in an Individual Retirement Account can cut the amount of taxes you pay on your nest egg, but they don't let you avoid taxes entirely. You can deduct contributions to IRAs on your federal and state returns if you meet certain income and work requirements, and you don't pay tax on investments held within your account. You may, however, owe federal and state income tax on withdrawals. The taxation of IRAs in New York mirrors the taxes you face on IRAs at the federal level.
Federal IRA Rules
Withdrawals from IRAs are considered a form of taxable income and are included with your ordinary wages for federal income tax purposes. If you withdraw cash before the age of 59 1/2, you also face a 10 percent early distribution penalty. You can avoid the penalty in some cases, such as if you are disabled or you have tax deductible medical expenses.
New York Income Tax
You use your federal adjusted gross income to determine your New York adjusted gross income for paying New York state taxes. Because IRA withdrawals are included in your federal income, they also end up getting included in your New York taxable income unless you qualify for an exclusion. In other words, you pay New York state income tax on any non-excludable IRA withdrawals in the year of distribution at the same rate that applies to your ordinary wages. If you have a Roth IRA, you do not owe New York state income tax on withdrawals that are tax-exempt at the federal level. Roth IRAs are generally tax-exempt unless you withdraw investment gains before the age of 59 1/2.
Pension and Annuity Exclusion
The State of New York offers a $20,000 annual tax exclusion on pension and annuity income. Qualified pension and annuity income includes periodic and lump-sum withdrawals from IRAs if you are over the age of 59 1/2. You cannot get an exclusion on IRA payments associated with contributions you made after you retired. If you make withdrawals in the year you turn 59 1/2, you can't exclude amounts you receive before you reached age 59 1/2.
If you are married, separate pension and annuity income applies to both you and your spouse for New York state taxes. The $20,000 counts whether you file a joint return or separate returns, but you can't combine your exclusions. In other words, if your spouse only uses $5,000 of her exclusion, you can't use the remaining amount to exclude $15,000 extra from your pension and annuity income.
- Internal Revenue Service: Traditional IRAs
- New York State Department of Taxation and Finance: Information for Seniors
- New York State Department of Taxation and Finance: General Information For Senior Citizens and Retired Persons
- New York State Department of Taxation and Finance: Instructions for Form IT-201 Full-Year Resident Income Tax Return
- New York State Department of Taxation and Finance: New York Tax Treatment of Roth IRAs
- SmartMoney: When Roth IRA Withdrawals Aren't Tax-Free
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