Ending my SEPP

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L1: Ending my SEPP
I was born April 1952 and began my 72(t) SEPP on Jan. 2002, and I turned 59 1/2 in Oct. 2011. I have been taking monthly equal payments during this time. This year beginning in May I began taking $500.00 less each month. My financial institution is saying
I have to make up the difference before the end of the year. It is my understanding that once I turned 59 1/2 my SEPP is done and converts automatically to a regular IRA distribution. If this is true my annual distribution amount for 2011can be less then
the amount set up in my SEPP.
2011-11-27 19:32, By: Bill, IP: [97.83.89.252]

L2: Ending my SEPP
You are right, sort of. Forgetting the 5-year rule, your plan will end when you reach age 59.5 – one day later to be safe. Using age 59.5 as the end of the plan, in the final year you can take…

The full annual distribution; or No distribution; or 9/12s of the annual distribution
What you can’t do is to take any amount other than above. Merely taking $500/month less may very well create problems unless the amount taken exactly equals the pro-rated annual distribution. Busting the plan this year would trigger retroactive penalties
and interest back to 2002 – very expensive.

2011-11-27 19:53, By: Gfw, IP: [205.178.73.77]

L3: Ending my SEPP
Well I guess I’m a little confused. My annual SEPP distribution was $54000. So my distributions for Jan., Feb., March & Apr. were $4500 then May thru Oct. were reduced to $4000 each month for a total of $42000 at end of Oct. So what if anything can I
do now that I’m over 59 1/2 ? Can I take any distributions for Nov. and Dec. ?
2011-11-27 21:44, By: Bill, IP: [97.83.89.252]

L4: Ending my SEPP
Since you have already exceeded the 9/12s amount, you should probably just follow your financial institution’s advice and take out the planned annual distribution of $54,000 (54k-42k = additional 12k) before 12/31/2011. If it were my plan, I would take it
out by 12/1 just to make sure and leave time for any errors/corrections.
2011-11-27 21:58, By: Gfw, IP: [205.178.73.77]

L5: Ending my SEPP
Ok, so I make up the difference by 12/31/11. Beginning in Jan 2012 I’m able to reduce the amount annually if I so desire?
2011-11-27 22:26, By: Bill, IP: [97.83.89.252]

L6: Ending my SEPP
Rolling the excess of your October distribution back could save your plan, but we need to know whether you took out your October distribution BEFORE or AFTER you reached 59.5. Please advise.
I am afraid that rounding out your annual amount may not work because you will probably get a separate 1099R for distributions after 59.5 coded 7, so the IRS will clearly see how much you took out after your modification date.
2011-11-28 00:20, By: Alan S., IP: [24.116.66.40]

L7: Ending my SEPP
I did take $4000 for Oct. before 59.5 so my total for the first 10 months was $42000, I took $4000 in Nov. and was going to take $8000 in Dec. for a total of $54000 for the year.

2011-11-28 10:31, By: Bill, IP: [24.247.17.130]

L8: Ending my SEPP
OK. Then you took out a total of 42,000 that were SEPP distributions before the plan ended. Just roll back 1,500 of the October distribution to reduce your total SEPP distributions to 40,500. which is 75% of 54,000 and you will
comply with all requirements. If you did another rollover within the last year, this won’t work so please advise if that was the case.
Anything you take out after 59.5 is NOT a SEPP distribution so there are no limits or requirements after that date. Therefore, if you want to replace the 1,500 that you are rolling back, go ahead. But you must do the rollover
if you are eligible to save your plan.
Note that even though you do this rollover, the 1099R will continue to show 42,000 distributed early, but there will also be a 5498 showing a rollover contribution. You will have to claim the exception on Form 5329 and just keep
your records of the rollover in the event that the IRS inquires. You only have 60 days from the date of receipt of the Oct distribution to roll it back, so time is running out. I would do this ASAP unless you are not eligible for a rollover.
All distributions after 59.5 will be on a separate 1099R coded 7 for normal distributions. Do not show any of these distributions as corrected on Form 5329, just show the total on the 1099R coded 1 (early). I assume you have
been getting a code 1 in the past and filing a 5329 each year.

2011-11-28 15:56, By: Alan S., IP: [24.116.66.40]

L9: Ending my SEPP
Thanks Alan for the info. I have set up a phone meeting with my broker tomorrow. Just so you have the info correct. I was born 4-28-52, I began my SEPP in Jan. 2002 and I have been taking $54000 annually in $4500 monthly distributions on the 5th of each
month. This year I turned 59.5 on Oct. 28th. and for 6 months during this period I took $500 less each month so my YTD distribution as of Oct. 28th was $42000 which is $3000 less then other yearly distributions to that point. I just want to clarify this
point before I go to my broker, because he, my tax people and my bank all have differing opinions and I want to advise them the best I can. Thanks again!
2011-11-28 17:40, By: Bill, IP: [97.83.89.252]

L10: Ending my SEPP
All very good advice, as usual, but it is possible that distributions in the year that a person turns 59.5 will not result in a second 1099 for the distributed amount that occurs after age 59.5 is reached. Vanguard, for example, only issues *1* 1099 per
account per year. If they have any exceptions to this in-house rule, I do not know of them. I agree that this event should require a 2nd 1099 be issued but it may or may not.
2011-11-29 05:54, By: Ed_B, IP: [71.236.204.181]

L11: Ending my SEPP
That’s very interesting about Vanguard, since they are not following the IRS 1099R instructions. This may arise out of Vanguard’s reasoning that since they are not “underwriting” the accuracy of any SEPP plan and coding them
all early (code 1), then until the modification date actually passes for a 5 year plan, they will continue to code distributions as early. The 1099R instructions indicate that if a SEPP is busted, a code 1 should be used even after 59.5. Since Vanguard is
essentially reporting that no plan meets requirements, it is consistent to use a 1 code until a 5 year plan ends.

For Bill, the rollback is the way to go since he will have records to prove the actual dates of distributions and the rollover, and in the end that should trump any 1099R coding that a 5329 does not resolve.
2011-11-29 17:24, By: Alan S., IP: [24.116.66.40]

L12: Ending my SEPP
Alan, In my situation how does a $1500 rollback help. I took a distribution in Oct. before the end of my SEPP which puts me $3000 behind the 10 month amount of $45000. Wouldn’t the rollback just put me further behind. Thanks, Bill
2011-11-29 18:26, By: Bill, IP: [24.247.17.130]

L13: Ending my SEPP
No, we are working with the 9 month amount under the reasoning that your plan ENDS in October and therefore your last distribution is for Sept. 9 months is 75% of the annual and 75% of 54,000 is 40,500.
Actually, the IRS has been flexible and if you wanted to use a 10 month pro rate factor of .8333, they would probably accept that. But since you can only get to the .8333 amount of 45,000 by taking out MORE and it is too late
to take out more because your plan ended on 10/28, we are left with the only option as the roll back to the 9 month amount. The 9 month amount is preferable anyway and I believe more technically correct than the 10 month amount.
Again, the problem with taking out more is that it will not help with your SEPP plan because the plan ended on 10/28. Therefore, additional distributions taken now are not considered SEPP distributions. But you have that 60 day
period where you can roll back 1,500 of your SEPP distributions to bring you back to the 9 month (75% of annual) total.
Note: You can still certainly take out more now if you need the money, but that is independent of your SEPP plan. It does not affect your SEPP plan either way if you take out more between now and the end of the year or not.

2011-11-29 20:34, By: Alan S., IP: [24.116.66.40]

L14: Ending my SEPP
Alan, OK it makes sense to me, but my broker was not to sure about it. When you say roll back…do I just have my personal bank wire the $1500 to my IRA bank and specify what its for? Sorry for all the questions but I want to get it right. Thanks,
Bill
2011-11-29 21:05, By: Bill, IP: [24.247.17.130]

L15: Ending my SEPP
Bill:
Rather than having your bank “wire the funds w/explaination,” my suggestion is for you to write a Letter of Instructions (LOI) to the IRA custodian explaining that the enclosed check for $1,500 (which you will write) is a “60-day rollover” and not a “contribution”
to your IRA.
Notes on checks tend to be overlooked but it’s hard to ignore an 8 1/2″ X 11″ LOI, signed by you giving explicit instructions how to handle the $1,500 check.
Jim F
2011-11-29 21:48, By: Jim F, IP: [70.167.81.119]

L12: Ending my SEPP
Yes, it is interesting but I spoke with a supervisor at Vanguard and she assured me that their policy is one 1099 per account per year. This was back in early 2010, so may not be the latest info. I was surprised that my 59.5 birthday came and went with
no change whatever in my SEPP plan status acknowledged by Vanguard. I did get a code “7” on my 1099 for the year following the year in which I turned 59.5.
As you say, though, Vanguard does not acknowledge ANY SEPP plan that their clients may have. They treat a running SEPP and a periodic withdrawal plan the same now and it is up to the customer to dot the “i”s and cross the “t”s if their plan actually is
a SEPP. This seemed a bit odd to me in that when I started my SEPP plan in early 2005, Vanguard required me to fill out their multi-page SEPP plan form. Although it was not required, I included a page containing a copy of my SEPP plan calculation work and
that was based on another Vanguard brochure for calculating SEPP withdrawal amounts. Apparently, they changed their policy on that after I started my SEPP because it was not too long afterwards that they eliminated this form from their web site. They still
have the standard periodic account withdrawal form, however.
As we all know from past experience and numerous comments from others on this site, quite a few of the custodians out there do not handle SEPP plans in the way that we would expect based on our interpretations of the pertinent IRC sections. Not that the
IRC is terribly clear on many of these matters, of course.

2011-11-29 22:04, By: Ed_B, IP: [71.236.204.181]

L13: Ending my SEPP
Ed_B:
I had a client start a SEPP Plan in his late 50’s with Putnam Funds. I never saw his 1099-R forms so I didn’t know how they were coded. When he turned 70 1/2 and was ready to begin taking his RMD’s, we found out that Putnam had never changed the coding
from “early w/exception” to “normal” when he turned 59 1/2. They explained that they didn’t automatically change the coding unless the client / rep requested they make the change.
Naturally I requested they immediately make the change for the current year and future years.
The moral to this story is find out your IRA custodian’s policy in these matters.
Jim F
2011-11-29 22:16, By: Jim F, IP: [70.167.81.119]

L14: Ending my SEPP
Indeed it is, Jim, which is why I contacted Vanguard, first by email and then by phone. Their response did not affect my SEPP plan but it was interesting to hear all the twists and turns in logic that they had to go through to arrive at their final policy.
As to Putnam, they went through a very rough business period some years ago. I don’t know if that had anything to do with this or not but that seems possible.
I find it odd that the IRS did or does not require custodians to report to the IRS that an account owner has reached age 59.5 point in an account that they hold… or does the IRS track this for the millions of US tax-payers?
How about the age 70.5 mark? Since that directly affects when the tax-payer must begin taking mandatory IRA withdrawals, one would think that custodians would be obliged to know when that occurred and report it to the IRS.
2011-11-29 22:26, By: Ed_B, IP: [71.236.204.181]

L15: Ending my SEPP
IRA custodians are definitely required to determine an IRA owner’s age and then to reflect that age in 1099R reporting.
My impression is that most IRA custodians do an accurate job in this, but there is that small slice of 72t plans where custodians have been tacitly allowed to write their own rules by the IRS. I won’t try to allocate the responsibility
for this between the IRS and the custodians, so let’s just say they are both responsible for the state of affairs.
As I see it, the majority of IRA custodians no longer attempt to underwrite the validity of a SEPP plan. But that still leaves them a choice to make when determining 1099R policy:
1) Totally dismiss that a SEPP plan may exist with the taxpayer – code everything as they would for any other taxpayer
2) Recognize that there is a SEPP in force, but code to assume the SEPP is invalid

The option chosen between these choices results in different 1099R coding after age 59.5 (7 for choice 1 and 1 for choice 2).
Of course, the above observations do not account for other non SEPP related policies that affect 1099R issuance or for simple processing errors.

2011-11-30 01:02, By: Alan S., IP: [24.116.66.40]

L16: Ending my SEPP
I have to defend all custodians on the SEPP 72-T issue. They have no way of knowing the total IRA and SEPP 72-T universe of any taxpayer, despite whatever documents that are submitted. Some taxpayers forget that they have certain accounts, or say that a
SEPP IRA account has $x in it, when in affect there is more and they are using only a part of it.
As a result of having been burned, most or all of the custidians now will take no responsibility for any SEPP plan. They will only acknowledge the distributions and balances of accounts. I can’t blame them.

( similarly they will not indicate the “non-deductible’ contributions to IRA accounts. That is a figure known only by the taxpayer or histaxpreparer.)
2011-11-30 02:43, By: dlzallestaxes, IP: [96.227.217.194]

L17: Ending my SEPP
Is it possible for a custodian to “take responsibility” for a SEPP? Somehow, I had the idea that a SEPP, like an IRA, is strictly between the tax-payer and the IRS.
All this furor over the 1099Rs that the custodians put out clearly shows that they are not on the same page with the IRS in this regard, as I have had the IRS tell me to “just tell your custodian to do xyz”. When I tell that to the custodian, they refuse.
OK, fine. But it would be good if the IRS realized that that they and the custodians are not interpreting the rules in the same way and take ther appropriate action to remedy the situation. I don’t know if the custodians realize that or not, not having
told the IRS to do what the custodian says. All I would ask is that the custodians and the IRS get their stuff together and get on the same page with the SEPP rules. This should not be too much toask, IMHO.
2011-11-30 05:14, By: Ed_B, IP: [71.236.204.181]

L18: Ending my SEPP
I am a liaison for the accounting profession(PICPA and PSPA) with the IRS ( as well as with PA, Phila, and local taxing authorities).
I have told my IRS contacts to visit this website to see the issues that we discuss here, and the need forrelated IRS regulations and clarifications.
Unfortunately, the IRS is devoting its efforts in trying to recoup the BILLIONS of dollars oftax refunds for bogus tax credits to inmates, IRS employees, storefront tax preparers, and fraudulent taxpayers for First-Time Home Buyers, Earned IncomeTax Credits,
Energy Credits, etc., despite the efforts of the gurus on this list-serve to bringSEPP issues to the attention of the IRS and the National Taxpayer Advocate.
2011-11-30 05:26, By: dlzallestaxes, IP: [96.227.217.194]