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Directive Directive 89-8: Pre-Retirement Distribution from State Retirement Plan Rolled Over into IRA; Taxability Upon Distribution

Date: 06/15/1989
Organization: Massachusetts Department of Revenue
Referenced Sources: Massachusetts General Laws

Personal Income Tax

FACTS: Millicent worked for the Commonwealth for 6 years and was a member of the State Contributory Retirement System established and maintained pursuant to General Laws, chapter 32. During this time, Millicent contributed to the state retirement system by means of deductions taken directly from her salary.

Millicent left the system before retirement. When she left, Millicent was not eligible for any pension but received a lump sum payment of $7,200, reflecting $6,000 in contributions to the fund, and $1,200 in accrued interest. She immediately placed this amount in an IRA to which she made no further contributions. Millicent has now begun receiving distributions from her IRA.

ISSUE: What are the Massachusetts tax consequences of the pre-retirement distribution Millicent rolled over into her IRA?

DISCUSSION: Under G.L. c. 62, § 2(a)(2)(E), income from a contributory retirement plan to which the employee has contributed is returned to the employee tax free. An employee who leaves the system before retirement may receive a lump sum payment consisting of his or her contributions plus accrued interest without incurring liability for income taxes on any part of the lump sum. See DOR-D 86-25.

When a pre-retirement distribution from a state contributory retirement fund is rolled over into an IRA, no taxable event occurs. When the distributions take place from the IRA, the Department will consider the entire amount of the original lump sum distribution as income from the contributory retirement fund exempt under G.L. c. 62, § 2(a)(2)(E). Thus Millicent may recover her entire contribution to the IRA - $7,200 - before her distributions will be taxed.

NOTE: Because the tax treatment of distributions from an IRA is different at the state and federal levels, a taxpayer should carefully maintain all records regarding the tax exempt nature of any distribution.

DIRECTIVE: Millicent's IRA distributions will be tax-exempt for Massachusetts tax purposes until she has recovered the entire amount of the pre-retirement distribution from the state retirement fund rolled over into her IRA. Once the aggregate of her distributions exceeds $7,200, all amounts Millicent receives from her IRA are fully taxable.

REFERENCE: G.L. c. 62, § 2(a)(2)(E); DOR-D 86-25.

/s/Stephen W. Kidder
Stephen W. Kidder
Commissioner of Revenue

15 June 1989

DOR-D 89-8


This Directive represents the official position of the Department of Revenue on the application of the law to the facts as stated. The Department and its personnel will follow this Directive, and taxpayers may rely upon it, unless it is revoked or modified pursuant to 830 CMR 62C.01(5)(e). In applying this Directive, however, the effect of subsequent legislation, regulations, court decisions, Directives, and TIRs must be considered, and Department personnel and taxpayers may rely upon this Directive only if the facts, circumstances and issues presented in other cases are substantially the same as those set forth in this Directive

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