Is There NY State Tax on IRA Distributions?

New York State taxes most types of income, but certain retirement benefits receive special treatment. If you have an Individual Retirement Account (IRA), understanding how distributions are taxed at the state level can help you plan withdrawals efficiently and avoid unnecessary tax burdens.

While federal tax rules apply to all IRA withdrawals, New York has provisions that may reduce or eliminate state taxes on some distributions. Knowing these details can make a significant difference in your overall tax liability.

Traditional IRA Distribution Tax Rules

Withdrawals from a Traditional IRA are subject to New York State income tax because contributions were made with pre-tax dollars. The state follows federal tax treatment, meaning distributions are taxable in the year they are received. This can increase taxable income and potentially push retirees into a higher tax bracket.

New York taxes IRA distributions at the same progressive rates as other income. For 2024, state income tax rates range from 4% to 10.9%, depending on total earnings. A large withdrawal may result in a higher marginal tax rate for part of the distribution. Retirees with other sources of taxable income, such as Social Security benefits or pensions, should consider how IRA withdrawals impact their overall tax situation.

Required Minimum Distributions (RMDs) must begin at age 73 under federal law, and New York follows this rule. Failing to take the required amount results in a 25% federal penalty, but New York does not impose an additional state penalty. Since RMDs are fully taxable, they can increase overall tax liability, particularly for retirees with large IRA balances.

Roth IRA Distribution Treatment

Roth IRAs provide tax-free withdrawals if certain conditions are met. Contributions are made with after-tax dollars, so qualified distributions—including both contributions and earnings—are not subject to New York income tax.

To be considered “qualified,” a Roth IRA distribution must meet two requirements: the account must have been open for at least five tax years, and the account holder must be at least 59½, disabled, or using up to $10,000 for a first-time home purchase. If these conditions are met, the entire withdrawal is tax-free at both the federal and state levels.

Non-qualified withdrawals may be partially taxable. Contributions can always be withdrawn tax-free, but earnings are subject to federal and state tax if withdrawn early. If an individual under 59½ takes a non-qualified withdrawal, the earnings portion is taxed and may be subject to a 10% federal penalty. New York does not impose an additional penalty but does tax the earnings if they are taxable at the federal level.

Subtractions and Credits for IRA Income

New York State offers a $20,000 pension and annuity income exclusion for residents aged 59½ and older. This exclusion applies to distributions from IRAs, employer-sponsored pensions, and certain annuities. If both spouses receive qualifying distributions, each can claim the exclusion separately, allowing joint filers to exclude up to $40,000 annually.

This exclusion applies only to distributions from IRAs funded with pre-tax contributions. Roth IRA withdrawals do not qualify since they are already tax-free. Nonresidents or part-year residents may have a reduced benefit based on their taxable income sourced to the state. Those who move out of New York midyear should review residency rules to determine how much of their IRA income remains eligible for this subtraction.

Certain taxpayers may also qualify for credits that reduce tax liability. The New York State household credit provides relief for lower-income taxpayers, though eligibility is based on total income rather than IRA distributions. The state also offers credits for taxes paid to other jurisdictions, which can help retirees who split time between New York and another state. Proper tax planning can prevent double taxation by ensuring credits are claimed correctly.

Withholding and Remittance Requirements

IRA distributions may be subject to tax withholding at both the federal and state levels. In New York, state income tax withholding on IRA distributions is voluntary. If withholding is elected, the minimum rate is 4%, which matches the state’s lowest income tax bracket. Federal withholding is typically set at 10% unless the recipient opts out or requests a different amount.

Financial institutions handling IRA withdrawals must process any elected New York State withholding and remit those funds to the Department of Taxation and Finance. If total withholding exceeds $700 annually, payments must be submitted electronically. Failure to withhold or remit properly can result in penalties for the distributing institution.

Additional Taxes on Early Withdrawals

Withdrawing money from an IRA before age 59½ can trigger additional taxes. The federal government imposes a 10% early withdrawal penalty on taxable IRA distributions, with exceptions for qualified higher education expenses, first-time home purchases (up to $10,000), and unreimbursed medical expenses exceeding 7.5% of adjusted gross income. New York does not impose an additional penalty, but early withdrawals are still subject to state income tax.

Taxpayers who qualify for federal penalty exemptions automatically receive the same treatment at the state level. However, early withdrawals increase taxable income, which may result in a higher overall tax liability.

Since IRA withdrawals are not subject to mandatory state withholding, individuals taking large early withdrawals may need to make quarterly estimated payments to avoid underpayment penalties. New York imposes penalties if total tax liability exceeds $300 and estimated payments were insufficient. Spreading withdrawals over multiple years or using penalty-free exceptions can help reduce the financial impact.

Residency Factors Affecting Tax Obligations

Residency status determines whether New York taxes IRA distributions. Full-year residents are taxed on all IRA withdrawals, regardless of where the funds were earned or where the financial institution is located. Part-year residents are taxed only on distributions received while they were New York residents.

Individuals who move out of state midyear may owe New York tax on withdrawals taken before their residency ended but not on distributions received afterward. Proper documentation, such as a change of domicile declaration or proof of residency in another state, is essential to avoid disputes with tax authorities.

Nonresidents do not owe New York tax on IRA withdrawals, even if the account was originally funded while living in the state. However, individuals with significant ties to New York, such as property ownership or business interests, may still be considered residents for tax purposes. The state has strict domicile rules, and failing to sever enough connections can result in continued tax obligations. Establishing residency in a state with no income tax before taking large distributions can help minimize overall tax exposure.