Vanguard and I differ.

L1: Vanguard and I differ.
I apologize for going over old ground here, but earlier this week I was thrown a couple of curves by a representative at Vanguard.
In discussing the pros and cons of creating a SEPP with aVanguard rep., I was advised that if a SEPP is found to be defective, by the IRS, the holder of the SEPP will be charged a 10% surtax on the entire value of the IRA. Example: Amount of IRA is 500K. Individual withdraws $30K per year for five years and is then audited by IRS. The individual must pay, according to the Vanguard rep., 10% surtax on the entire $500K ($50K), plus interest. I thought the surtax would be $15K (10% of the $150K that was withdrawn), plus interest. Vanguard insists otherwise.
Moreover, it’s my understanding that an individual has what might me construed as a “safe harbor” for the first year of his SEPP. In other words, even after creating a SEPP, one is not committed to it for five full years UNTIL one files his taxes after the first year, and checks the appropriate box on form 5329. Until this is actually done doesn’t the holder of the SEPP have the option to abandon the SEPP (anytime during the first year) and simply pay the 10% penalty on the first year’s distributions, at which point he is free to walk away from further commitments?
Vanguard advises me that I do not have this option. 2008-01-03 13:36, By: Reg, IP: [74.136.102.241]

L2: Vanguard and I differ.My first guess is that Vanguard would not put either statement in writing as by the time it got authorized, someone that knows the subject would have been consulted.

The 10% penalty applies only to the distributions that were part of the SEPP, not the entire IRA.

You can bust a SEPP at any time, including in the first year.
If you have the name of the individual at vanguard that you talked to, perhaps they need an invitation to review the information on this site before they give answers to clients that call into their office.
2008-01-03 13:46, By: Gfw, IP: [74.136.102.241]

L2: Vanguard and I differ.The owner of this site should write a letter to the President of the Vanguard Group expressing his dismay that Vanguard reps are not adequated trained/educated on the topic at hand.
Joel L. Frank
Pension Columnist
The Chief-Civil Service Leader
277 Broadway
New York, NY 10007

2008-01-03 14:00, By: joel, IP: [24.187.32.203]