How to use NY’s $20G exemption for retirement income

Did you know that the first $20,000 that is withdrawn from a 401(k) or IRA is exempt from New York State income tax? This might be good news for you.

“If you receive a distribution from a pension or annuity (that was not from employment with the local, state or federal government) you may qualify for an annual income exclusion up to $20,000 of your withdrawals. Not all pension and annuity income qualifies, but if yours does and you can afford to do so, it would be beneficial to withdraw $20,000 a year to get the exemption,” says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.

• What comes into play?

If you were 59 ½ before the first day of the tax year, you can enter your qualified pension and annuity income in your adjusted gross income on your return, up to $20,000. If you turned 59 ½ during the tax year, you can enter the amount you received after turning 59 ½, up to $20,000.

Furthermore, if you’re married and both qualify, you and your spouse can both take the $20,000 exclusion of your own pension and annuity income. “But you can’t claim part of your spouse’s unused exclusion,” Zimmelman says.

Know too, if you are already claiming a disability income exclusion, you can only take up to $20,000 total inclusion (disability + pension and annuity).

• Death

If you are the beneficiary of a deceased person’s qualified pension and annuity income, you can take their exemption, but only if they would have been entitled to it had they lived. That is, in the tax year that they would have become 59 1½, you can take their exemption of up to $20,000. (If there is more than one beneficiary, it will be allocated among them all; they don’t all get to take $20,000 each.)

However, Al Zdenek, president, CEO of Traust Sollus Wealth Management in Manhattan, thinks it may be better to let the money grow tax sheltered in this instance. “If the person is not required to take a distribution, or does not need the money, there is still federal tax to consider. I would sooner leave the money there and let it grow tax deferred to a year when the federal tax rate is low.”

As always, talk to your financial adviser to help you decide what’s best for you.