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IRAs/Roth IRAs/Tax-Favored

Income from separate property is income of the RDP who

owns the property .

Accounts

When filing separate returns, the domicile of the RDP

who earns the income determines the division of income

An RDP will not be treated as a spouse where such

between the RDPs . For income tax purposes, the income

treatment would result in a tax-favored account, such as

of RDPs domiciled in a community property state may be

a Achieving a Better Life Experience (ABLE) Account,

community income or separate income . When RDPs file

Individual Retirement Account (IRA), Roth IRA, Coverdell

separate returns, each RDP reports the following:

Education Savings Account (ESA), Archer Medical

Savings Account (MSA), or IRC Section 529 plan

•

One-half of the community income .

(Qualified Tuition Program), no longer being qualified as a

•

All of his or her separate income .

tax-favored account for federal purposes .

For more information on community property, get federal

For example, under federal law, the beneficiary of a

Publication 555 . RDPs will use the rules in federal

Coverdell ESA may transfer the remaining balance in

Publication 555 for married people for California income

an ESA to a new beneficiary . This new beneficiary shall

tax purposes . The note in Publication 555 regarding

be “a member of the family,” which is defined broadly to

California RDPs applies only to the filing of your federal

include the following relatives of the original beneficiary:

return .

spouse, child, brother, sister, stepbrother, stepsister,

stepfather, stepmother, etc . Because federal law does

Pension Plans

not recognize an RDP as a spouse, the transfer of the

balance in an ESA to a taxpayer’s RDP or an RDP’s

For qualified pension plans, an RDP will not be treated

child would result in the Coverdell ESA no longer being

as the spouse where such treatment would result in

treated as a qualified tax-favored account for federal

the disqualification for federal income tax purposes of a

income tax purposes . Instead, the change in beneficiary

pension plan .

would be considered a non-qualified distribution from

the tax-favored account subject to additional tax of

Anti-alienation provisions, applicable to qualified pension

10% for federal tax purposes and 2 .5% for California

plans, prohibit assignment or transfer of plan assets

tax purposes . Therefore, for California purposes, an

except through a qualified domestic relations order

RDP would not be treated as a spouse for purposes of

(QDRO) or by certain survivor benefits . A QDRO is

changing the beneficiary of a Coverdell ESA .

generally a court-ordered division of a qualified pension

plan between spouses in relation to a divorce, a property

In the event of a distribution from an IRA, Roth IRA, or

division, or provision for child support . Because federal

other tax-favored account, because federal law does not

law does not recognize an RDP as a spouse, a plan will

recognize RDPs, a taxpayer whose RDP or RDP’s child

not be disqualified for California income tax purposes if

receives distributions from the taxpayer’s IRA, Roth IRA,

a QDRO between RDPs is not recognized or if survivor

or other tax-favored account, may incur additional tax

benefits are not available to RDPs .

penalties for federal income tax purposes, but not for

California income tax purposes .

For example, in an IRA, if you take an early distribution

from your IRA to pay the higher education expenses of

your RDP or the child of your RDP, for federal purposes

you would probably owe an additional tax of 10%, but

for California purposes you would not owe the additional

tax of 2 .5% . However, for both federal and California

tax purposes, you would need to include in your taxable

income the early distribution from your IRA, unless you

have a basis in the IRA that may be recovered tax-free .

For California income tax purposes, if you and/or your

RDP is covered by an employer-provided retirement

plan, then your California deduction for an IRA

contribution may be limited . See the example for line 32

in the instructions for California RDP Adjustments

Worksheet (included in this publication) . The amount of a

nondeductible IRA contribution creates a California-only

IRA basis that is recoverable from IRA distributions that

would otherwise be taxable for California income tax

purposes . Keep track of your California basis in your IRA .

For general information about recovery of a California-

only basis, get FTB Pub . 1005, Pension and Annuity

Guidelines .

FTB Pub . 737 2016 Page 5

California Rdp Adjustments Worksheet - Recalculated Federal Adjusted Gross Income - 2016 Page 5

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