Principal Originated With Nontaxable 403(b) Retirement Account
In Magen v. Department of Treasury, Michigan Court of Appeals, No. 302771, February 21, 2013, the Michigan Court of Appeals has held that the distributions from a private IRA whose principal wholly originated in a nontaxable 403(b) retirement account were not subject to the personal income tax. The Department of Treasury argued that because the distributions came directly from a private IRA the distributions must be taxed regardless of the fact that the IRA principal came from a tax-free retirement plan. Private IRAs were not normally tax-free, but rather tax-deferred. At retirement, state retirees received tax-free benefits in the form of periodic annuity payments or in a single lump-sum payment. The lump sum could be deposited into an investment account or a bank account, but the amount deposited was not taxable when it was withdrawn. In this case, the income placed in the IRA was not state tax-deferred income but, rather, state nontaxable income. Obtaining deferral on the applicable tax by rolling the money over into an IRA did not create a deferred obligation to pay state income tax on the money that was not subject to personal income tax to start with.