Happy Half Birthday!

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L1: Happy Half Birthday!Happy Half-Birthday to me,Happy Half-Birthday to me,Happy Half-Birthdaaaay to meeeeeeee,Happy Half-Birthday to me!(chorus: And M-A-N-Y mooorrrre!)
Well, gee, boys n girls. Here it is 2/6/2009 and I am 59.5 years old today. Woo-Hoo! This is the first timein 54 years that I have used a half-year birthday for a celebration. Best of all, it’s not over yet. Therewill be one more of these in 11 years. YEA!
Ed_B (with tongue quite far in cheek)2009-02-07 07:12, By: Ed_B, IP: []

L2: Happy Half Birthday!Hi Ed,Now you can take non-penalty withdrawals from any IRA not connected to your SEPP plan. You didn’t tell us if you are also celebrating the end of your SEPP plan. I know mine has to run till I am 61. If not over yet, at least you can switch it to RMD and then take non penalty IRA money from your otherIRA (I’m sure you planned ahead) for only what is needed– if that option sounds more appealing than the continued fixed withdrawals from your SEPP plan, especially inthis down market. KEN2009-02-07 14:15, By: Ken, IP: []

L3: Happy Half Birthday!Hi, Ken:Yes, my SEPP is still running and has a year to go. I started it in March 2005 at age 55.5, so will need to go until age 60.5. Not a problem. I am not planning to switch to the RMD method. Imoved enough assets into cash within my SEPP IRA in the fall of 2007 to see it through until it ends in 2010. Once I get to that point, I will see what the economy is doing and will adjust my withdrawals as needed. We do have a couple of small Roth IRAs but are planning to donate them to our two grand kids education funds. Our grand son, Erik, may or may not be interested in college but our grand daughter, Mikayla, is VERY intelligent and will definitely be heading for college and graduate school.It will be interesting to see how my 1099-R is coded this year. I am on the quarterly payment plan so won’t get my 1st payment for 2009 until mid March. Since Vanguard, like many other custodians, does not acknowledge that I even have a SEPP, I am betting that they will code this year’s 1099-R as a “7” for normal distribution. If that reduces my chances of an IRS inquiry, so much the better. :-)2009-02-07 19:16, By: Ed_B, IP: []

L4: Happy Half Birthday!For the year that you turn 59.5 you will receive two Form 1099-R’s. The first one will cover the period of distributions pre-59.5 and will be coded 1 or 2, depending on your custodian. The second form will cover the period of post-59.5 distibutions and will be coded 7 for “Normal Distributions.”Last Friday I spent over an hour with a client to convince him that everything was OK with his wife’s SEPP Plan distributions and all he had to do was give both forms to his CPA and she would know what to do. I had to assure him that I would be happy to speak with their CPA if she had any questions on the subject. This guy is a retired banker, and I think they are harder to deal with than engineers, and I’ve got both categories for clients.Speaking of Form 1099-R’s, and other such reporting forms, I just found out today that The IRS has delayed until February 15th to get these reports into the mail instead of January 30th. So if you haven’t received your forms yet, don’t panic but give it a couple of more weeks.HAPPY 59.5 BIRTHDAY!Jim2009-02-09 20:33, By: Jim, IP: []

L5: Happy Half Birthday!Hi, Jim:Thanks for the 1/2 birthday wishes… they are appreciated. :-)I don’t know if I get two 1099-Rs for 2009 or not. That would, IMHO, be a reasonable way to handle this but perhaps there are other ways that are also workable. Not sure if Vanguard will look at this situation and think that I did not get any pre-age 59.5 payments in 2009 or not. My 1st 2009 quarterly SEPP payment will be after my 59.5 birth date, so perhaps all four of my SEPP payments this year will qualify as code “7” on a single 1099-R. If so, that will be fine.I did ask Vanguard some months ago whether or not they would issue two 1099-Rs to anyone who turned 59.5 in the middle ofa year and they said “no”. They would only issue a single 1099-R for that year and the client could file the appropriate paperwork to keep things straight with the IRS. I suppose that means a form 5329.No, I never panic… although I did come close last year when Vanguard issued a dividend check to me from a fund in my SEPP plan IRA. They got it rolled back into the fund and it did not show up in the amount distributed from my SEPP plan, so all is well there. Made what little hair I have left stand on end for a bit though.2009-02-09 22:47, By: Ed_B, IP: []

L6: Happy Half Birthday!We know that Vanguard and most other custodians will not provide an exception code for 72t distributions on the 1099R. However, I do not think that they also necessarily subscribe to the same1099R procedures. For example:1) If custodian codes pre 59.5 distributions as early and they know your 72t plan must run beyond 59.5 to meet the 5 year requirement, it would be logical to code post 59.5 distributions as early also, if they are within the plan’s 5 year term. If they will not confirm validity pre 59.5, how can they post 59.5? 2) Or the more common perception that they are washing their hands of the plan entirely and do not even recognize it’s existence. In that case, they would code as if you never had a plan, and post 59.5 distributions would be coded 7.Does anyone know which of thesepositions Vanguard has adopted?2009-02-10 00:00, By: Alan S., IP: []

L7: Happy Half Birthday!Alan:While I have not had Vanguard state this to me verbally or in writing, my best guess is that their stance is #2. I have had both email and phone contact with various Vanguard reps and this is consistent with the behavior I have experienced since I started my SEPP in March 2005.I find it more than a bit curious that after filling out their 8 page SEPP application form, calculating the SEPP distribution amounts in accordance with their SEPP brochure, and receiving exactly that amount every quarter for 4+ years, they do not and will not admit that I even have a SEPP. I bet that they are very confused as to just what it is that I am doing… as in NOT!Seriously… if I had known that they would do this I would have reconsidered whether or not they were capable of handling my financial needs. We intentionally did not move my wife’s IRA to Vanguard for this very reason. It is still at TD Waterhouse and will likely remain there for the foreseeable future. If they want to play this game, we will too… and it WILL cost them.2009-02-10 00:18, By: Ed_B, IP: []

L8: Happy Half Birthday!I can’t comment about Vanguard since I have never had any expreience with them. However, I have used several different custodians and each one operates the same concerning pre and post age 59.5 reporting.All of their computers are set to track birthdates and respond accordingly. All distributions made pre-59.5 will either be coded 1 or 2, assuming no other exception applies. All distributions made post-59.5 will be coded 7 for “Normal.”Ed, my guess is that you will get two 1099-R’s during the year you turn 59.5, assuming you receive ANY distributions before the age-change date. If all distributions are after you turn 59.5, eventhough you are still under the 5-year constraint of 72(t), then you should get one 1099-R and it will be coded 7. Custodians have gotten away from worrying about you complying with 72(t) once it is set up.If anyone has been through this situation with Vanguard then now would be a great time to chime in.Jim2009-02-10 15:39, By: Jim, IP: []

L7: Vanguard coding post 59.5Alan,”Does anyone know which of thesepositions Vanguard has adopted? “I presently have a SEPP with Vanguard. Turned 59.5 May ’08. Take monthly distributions. Received only one (1) 1099-R for 2008 with the yearly total coded as a “1”. I’ll just continue to file the 5329 until the SEPP as run its course in 2 more years.Originally,I set up my 72T by telephone with one of their agents 3 years ago. I did not fill out the 8 pg. booklet other than to keep a copy for myself. Not really sure whether Vanguard recognizesmy account as a72T or not for completing the 1099, but I only received one 1099 with coding for early withdrawal even though some of the distributions occurred after attaining 59.5.meb242009-02-10 15:47, By: meb24, IP: []

L8: Vanguard coding post 59.5Good morning Meb.I assume your one 1099-R, coded 1, is for the correct annual amount of your SEPP distributions. If the amount only covers the months of distributions before your age 59.5, then your other 1099-R may be yet to come, especially since the IRS has delayed the mandatory distribution date.If Vanguard does not break the year into pre and post 59.5 periods and issue two different 1099-R’s, I find that really strange.To the best of my knowledge, all distirbutions after someone turns age 59.5 are, by definition, “Normal” and should be coded 7.Since you have the account with Vanguard, would you mind giving them a call and simply askwhy they have not issued a 1099-R to cover your distributions post-59.5? The answer should be interesting.Thanks.Jim2009-02-10 16:34, By: Jim, IP: []

L9: Vanguard coding post 59.5Hello, meb24:Your experience is consistent with what I have seen so far from Vanguard. I find Vanguard to be a very good custodian but on this issue they seem to be a bit overly cautious. After months of searching, I still have not found ANY IRS rules / regs that even imply that a custodian is responsible for the validity of a 72t / SEPP plan, yet that is what a lot of custodians infer. Their thinking seems to be “Maybe if we completely ignore SEPPs, they will go away?”, at least as far as the IRS is concerned. As others have pointed out on this web site, however, an IRA is 100% between its owner and the IRS. The custodian is not involved, other than as a holder and distributor of the funds.When did you receive your 2008 1099-R? Seems to me that if they were going to issue two 1099-Rs, that both of them would have arrived fairly close together.Jim:I agree that two 1099-Rs would be the way to go in a year that contains both pre and post age 59.5 distributions so that all distributions would be duly noted and documented correctly. Fortunately for me, all of my 2009 distributions will occur after I reached age 59.5. That should result in a single post age 59.5 1099-R that shows all distributions as “normal”.Ed2009-02-10 17:48, By: Ed_B, IP: []

L9: Vanguard coding post 59.5JIM,The One and only 1099 for this accountis for the total annual amount withdrawn in 2008. I did check online and there is no other 1099 listed and I’m pretty sure this will be the only 1099 for that account since it is exactly for the amount withdrawn in 2008.I hope this doesn’t present a problem when filing my taxes. I was just going to file a 5329 and code the entire yearly withdrawal a “2”. Not sure there is any other way with only one 1099 and don’t want to arouse any suspicions with the IRS. After my 2nd year, I did receive the “obligatory notice”, you owe the 10% penalty. But after calling them and referring them to my 5329s they sent me a letter stating the issue has been “CLOSED”. In checking my profile on the account it has this account listed as series of systematic withdrawal and that may be what triggers onlyone 1099. I have no idea since others have had some complaints with the way Vanguard approaches 72T. So far, I have nothad any problems or concerns whatsoever with Vanguard.I recently did a change to the RMD method for the remaining two years. I did this online myself (no interaction with Vanguard) and all seems to be going fine. Of course, I’ve only had one distributionin January and expect the second one next week.The only problem I see arising is related to State Income Taxes — PAtaxes my 72T withdrawals before 59.5 (this IRA was originally setup from a Lump Sum Distribution from Pension Plan), but they are tax-free after 59.5 soI will split the amount on the PA State Income Tax form.Will there be any problem with coding the entire yearly withdrawal with a “2” on my 5329?meb242009-02-10 19:20, By: meb24, IP: []

L10: Vanguard coding post 59.5Well, I guess we have the answer to how Vanguard runs their ship when it comes to Form 1099-R as related to SEPP Plans. For the Federal return simply fileForm 5329 as you have done in previous years.Your PA state taxes may be an issue since the states get a feed from the Feds of all W-2, 1099, and other such reporting documents. So it stands to reason that PA will have your 1099-R from Vanguard also. I can’t tell you how to handle this situation but you probably have to do some type of corrective reporting so you don’t pay taxes on your post-59.5 SEPP distributions.DLZTAXES is a CPA in PA and I’m sure you have seen his posts here in the past. Hopefully he’s not too burried in tax preparation these days and will be able to comment on your situation.Good luck.Jim2009-02-10 20:48, By: Jim, IP: []

L11: Vanguard coding post 59.5meb,Your case with Vanguard suggest that they may be situation (1) in my earlier post. Again, they could be saying that they are not confirming the validity of your plan prior to age 59.5, and therefore they also are not willing to validate it after 59.5.With respect to the 5329 filing, the instructions for the form are not totally clear when there are multiple reasons, as the instructions indicate that exception code #12 applies (Other/multiple exceptions). You could use 12 under the rationale that 2 applies pre 59.5 and 7 applies later, but 7 itself is NOT an exception code.But I agree that exception 02 will probably work just as well, particularly since Vanguard is indicating that ALL your distributions are “early”. The only way that the post 59.5 distributions could be “early” is if you modified the plan after 59.5. Showing the 02 tells the IRS that you did not commit any such modification. Enter the entire 1099R amount on line 2 of Form 5329.I have no idea which of the two (2 Vrs 12) is the least likely to trigger further questions.So, is the half birthday still such a happy day???? Less so for Vanguard SEPP participants.2009-02-11 01:31, By: Alan S., IP: []

L12: Vanguard coding post 59.5Alan:I have had no indication from Vanguard that they even admit that I have a SEPP plan in progress. I would think that validity would come after such an admission, if it were to come at all.As to the “2 vs. 12” issue, Ihave to think that a “2”would be much more common on 5329s and therefore less likely to raise any red flags. Anyone with a SEPP plan in progess should be getting a “2” code on their 5329… we just aren’t and apparently because of a complete lack of communication between the IRS and the investment custodian community. I keep hoping that the IRS will clarify this issue suchthat all custodians MUST code a 1099-R for a SEPP plan with a “2” if the client requests such in writing and signs the letter.That would eliminate the need for this blizzard of 5329s with which the IRS must contend. I have to think that eliminating all these unnecessary forms would streamline IRS operations and make them more cost effective. One would further think that this would be an issue of concern for the IRS but apparently it is not. Each time I have had contact with the IRS about this, they tell me to “contact your custodian and have them issue an amended form 1099-R”. Apparently, they are unaware thatmost custodiansabsolutely will not issue an amended 1099-R for this reason.2009-02-11 19:10, By: Ed_B, IP: []

L13: Vanguard coding post 59.5Ed. I have greatly enjoyed reading your posts with your excellent analysis of situations and solutions to problems. But I’m really surprised when you say …”I have to think that eliminating all these unnecessary forms would streamline IRS operations and make them more cost effective. One would further think that this would be an issue of concern for the IRS but apparently it is not.” Don’t you understand that if The IRS operated per your comments above that it would eliminate their jobs? Don’t you recognize this is the basis of the “IRS full employment program?” Common sense is not an importantelement of Government operations! Come on, Ed,get with the program!(Ha Ha)Jim2009-02-11 19:27, By: Jim, IP: []

L14: Vanguard coding post 59.5Sorry, Jim. I must have lost my head there for a minute! My only defense is “campaign rhetoric overdose”. ;-)OTOH, if the IRS and other DC bureaucracies could eliminate a lot of wasted effort, perhaps they could then pay *some* attention to the Bernie Madeoff types.Ed2009-02-12 00:19, By: Ed_B, IP: []

L15: Vanguard coding post 59.5Madeoff – should have spelled it that way from the start…….Ed,Note that the technically correct 1099R coding for a plan that continues beyond 59.5 is to code the post 59.5 distributions with a 7, not a 2. There would be two 1099R forms for the 59.5 year, one showing Code 2 for pre 59.5 distributions and another with Code 7 for post 59.5 distributions. This is another incremental cost savings for the Code 1 bunch.The 5329 instructions are not clear on how the IRS desires the form to be completed for the age 59.5 year. The reason for that is the 5329 instructions do not comtemplate the reality that many custodians have decided to “opt out” of the job of underwriting the validity of these plans.Whichever method most taxpayers have used seems to be effective in most cases.2009-02-12 01:28, By: Alan S., IP: []

L16: Vanguard coding post 59.5Alan:In a previous post, you said that the coding would be “12” or “2”. Of those choices, 2 is the obvious choice. I can see now that this was a typo and you really meant to type “1” or “2” and not “12 or 2”. I agree that all post 59.5 distributions should be coded as “7” for “normal distribution”, since whether one has a SEPP or not is irrelevant to the question of whether they are 59.5+ or not.As was just stated in this thread, Vanguard did not issue a 2nd 1099-R in the year in which they turned 59.5 and had both pre- and post- age 59.5 SEPP distributions. As Jim pointed out, sending out two 1099-Rs for this situation is the reasonable thing to do and it is also what I thought should be done. For whatever reason, however, Vanguard does not see it this way.My question is, does this matter? I suppose that if the 10% penalty is not being paid, due to the72t exception, then the tax liability does not change when one reaches age 59.5 and the SEPP is still running. If a person were taking non-SEPPdistributions from their IRA and paying the penalty on them, reaching age 59.5 would havetax liabilitysignificance. Perhaps in that case they would get 2 1099-Rs?2009-02-12 04:02, By: Ed_B, IP: []

L17: Vanguard coding post 59.5Ed,Yes, in a non SEPP situation, there is no question that there should be two 1099Rs split between codes 1 and 7.The “12” was not a typo in my previous post. Per the Inst for Form 5329, if there is a need to apply more than one code, #12 is the dump code to use and is referred to as “Other”. It is also to be used when a distribution is incorrectly shown as a “1”, and there is no other exception code provided to change it to. The instructions do not contain an option to change amounts to normal (Dist Code 7). In the 5329 exceptions listing 07 is used for distributions to the unemployed for health insurance premiums. Therefore, the only way to change any part of the 1099R to a Dist Code 7 is to use #12. Since you are technically changing some of the 1099R to Code 02 (pre 59.5) and the rest to normal, Code 12 appears to apply.But even though a custodian like Schwab who recognizes SEPP plans would issue two 1099R forms coded 2 and 7, I think your plan of just indicating exception 02 would be fine.Bottom line is that the Inst for Forms 1099R and 5329 are not designed to contemplate that some custodians, actually most of them, would decide on their own to simply code everything as early, including some of them coding the post 59.5 distributions as early because they know your SEPP must run past age 59.5 even though they do not approve the numbers in the first place. The IRS never contemplated this in the 5329 instructions or the 1099R instructions, but I think they ought to address the problem.2009-02-12 23:34, By: Alan S., IP: []

L18: Vanguard coding post 59.5Alan:Thanks for the clarification and the explanation of the meaning of a code 12 1099-R. This whole topic seems to be not especially well thought out by either the IRS or the custodians, so is confusing to those of us who are not completely proficient in this area. I am hoping that all of my 2009 1099-R will show a normal distribution code. Since my 1st quarterly SEPP payment occurs 6 weeks after my 59.5th birthdate, that should be the case. Oh, well. I guess I will worry about that when / if it happens.2009-02-13 00:23, By: Ed_B, IP: []