Missouri Department of Revenue, MO—LR 8197,Missouri,(Jun. 17, 2022)
Taxpayer was a retired Federal government employee who worked for the USPS. Under the Federal Employees Retirement System (FERS), they receive a pension from the Office of Personnel Management. In addition, taxpayer has a component of their retirement under FERS as a defined-contribution plan, known as the Thrift Savings Plan (TSP). This plan is overseen by the United States Congress and funded by both employee contributions as well as agency matching employer contributions (the USPS). Two years ago, approximately $250,000 was transferred from the TSP into an IRA account. Additionally, in May of 2022, approximately $68,000 was transferred from the same IRA account into the original TSP account.
Withdrawals made in retirement from the TSP are “retirement benefits received from sources other than privately funded sources” for purposes of section 143.124.5, except for the portion of those withdrawals attributable to the funds transferred from the IRA.
Section 143.124, RSMo, prescribes when certain retirement benefits or allowances may be subtracted from an individual income taxpayer’s Missouri adjusted gross income. This statute identifies retirement benefits or allowances as either “from any privately funded sources” or “from sources other than privately funded sources.” Subsection 3 of Section 143.124 describes the circumstances under which a taxpayer may subtract “any retirement allowance received from any privately funded sources,” for tax years beginning on or after January 1, 2002, and subsection 5 describes the circumstances under which “retirement benefits received from sources other than privately funded sources” may be subtracted for tax years beginning on or after January 1, 2007.
Generally, the retirement benefits allowed to be subtracted under Section 143.124, RSMo, must have been included in the taxpayer’s federal adjusted gross income and not otherwise deducted in calculating Missouri taxable income. For retirement benefits from “sources other than privately funded sources[,]” the maximum possible subtraction is equal to a figure called the “maximum Social Security benefit available”, which began at $32,500 for tax year 2007 and has been increased for inflation. To be eligible for this maximum subtraction, a taxpayer must have Missouri adjusted gross income equal to or less than the threshold of $85,000 (if filing as single, head of household, qualifying widow(er), or married filing separately) or $100,000 (if married filing combined). For each dollar by which the taxpayer’s Missouri adjusted gross income exceeds the applicable threshold, the maximum subtraction allowed to that taxpayer is reduced by a dollar.
The TSP is administered through an entity created by federal law and is a “governmental plan.” IRC Section 414(d) defines this term and reads, in part, as follows:
For purposes of this part, the term “governmental plan” means a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.
Although this plan is funded, in part, by employee contributions, the federal government established and maintains the plan and is the payer of the benefits. Moreover, the taxpayer’s employee contributions were deducted from compensation paid to the taxpayer by the taxpayer’s government employer. Except for the portion of the withdrawals attributable to funds transferred from the IRA, benefits paid by this plan are not from privately funded sources, but are from sources other than privately funded sources, for the purposes of Section 143.124.5.
By contrast, an IRA is “a trust created or organized […] for the exclusive benefit of an individual or his beneficiaries” and the trustee generally must be a bank. IRC Section 408(a). An IRA is a private source of funding for retirement and, when funds are transferred or rolled over from an IRA into a TSP, the funds do not lose their character as a private source of retirement benefits. Accordingly, the portion of a withdrawal in retirement from a TSP is a retirement benefit “from any privately funded sources” to the extent the amount withdrawn is attributable to funds from the IRA.