Question about Custodians
L1: Question about CustodiansI”m just starting to seriously investigate SEPP”s, and have a few basic questionsabout the custodians. Is it typical that any IRA holder will act as the custodian and make the distributions (for a fee or free?) For example, I”m considering converting an IRA that is with Vanguard now, and is mostly in stocks/mutuals. Will they likely administer the SEPP and make the distributions, or will I need to move the funds to another institution.Logistically, should I sell enough equities of my choosing from the account so there is plenty of cash for distributions for the coming x months? Can I choose the distribution frequency? Thanks!! Jackie2008-07-29 07:12, By: Jackie, IP: [184.108.40.206]
L2: Question about CustodiansHello Jackie:
You have posed about 1/2 dozen questions; however, your central question seems to be about how to pick a good trustee / custodian with respect to making SEPP distributions. In this regard, just about all nationally known brokerage companies and mutual fund companies are well equiped to handle SEPP plan distributions. As a result, when picking a trustee / custodian, I would look to other features and benefits of a particular trustee when chosing one over another. said another way, all trustee / custodians know how to correctly follow your SEPP instructions; it”s just not that difficult to do.
[email protected] 07:28, By: TheBadger, IP: [220.127.116.11]
L2: Question about CustodiansAs you will see from other postings on this list-serve, many people have been very pleased with Vanguard for their SEPP 72-T. I think you would have the least possible problems by staying with Vanguard, and having them make internal transfers, rather than starting with another company where there can alwys be possible problems in setting up a new account, getting used to dealing with a new company, or any problem with the electronic transfer.
Vanguard offers everything any other company has, as well as very low, if not the lowest, fee structure.2008-07-29 09:15, By: dlzallestaxes, IP: [18.104.22.168]
L2: Question about CustodiansHi Jackie:
I don”t know of any custodian that can”t handle SEPP Distributions. It”s a straightforward transaction and once set up it”s pretty much automatic. From what I”ve seen the biggest problems occur when the IRA owner tries to do some really strange and exotic things which don”t fit with the custodian”s systems. Just work with your custodian and let them help you set it up.
You do NOT have to only have cash in your SEPP account(s), so I would not recommend selling all of your stocks & funds to have an all-cash SEPP Plan. Your question raises the question about your experience managing investments. If you have only use the DIY method, then I would suggest finding a Financial Advisor that will work with you on a fee basis to develop a plan for you to follow. You might find, after meeting with this person, that you would desire to hire him / her to take on the task of managing your portfolio. You may be surprised to find the benefits outweigh the envisioned cost savings of continuing to DIY.
Jim2008-07-29 09:34, By: Jim, IP: [22.214.171.124]
L2: Question about CustodiansHello, Jackie:
I found myself in your position a few years ago, so can answer most of your qestions.
I had done some business with Vanguard and was pleased with the result. I decided to roll my 401k plan money into a Vanguard IRA. Vanguard has a nice how-to type brochure for SEPPs on their web site that can be downloaded here:
Choose the lower of the two items to retrieve the SEPP information brochure. It is well done and explains how to set up a SEPP.
Vanguard does not charge a fee for SEPP distributions. They make their money from fees on the various stocks and funds their customers own.Vanguard will not officially recognize that their clients have SEPPs, so they will mark the annual form 1099-R box 7 witha “1” for early distribution, no known exception. The client then has to file a form 5329 with the IRS to claim the exemption from the 10% early withdrawal penalty tax. Lots of custodians do this. It”s a minor irritation and one that is easily handled by the Turbo Tax and Tax Cut software programs.Overall, my experiences with Vanguard have been quite positive and I would recommend them to anyone who wants their retirement fundsprimarily in Vanguard mutual funds. For stocks, I use Scottrade and TD Ameritrade. Both work well for me and have much lower fees to buy and sell stocks than Vanguard”s brokerage.Vanguard will administer and distribute SEPP payments to you at the frequency you choose. This can be annually, semi-annually, quarterly, or monthly. I use the quarterly payment option and it works well for me. Others might prefer some other frequency that better fits their needs. You will need to watch the payments, however, and make sure that the correct amount for your SEPP is distributed each time. Also watch out for distributionsof interest or dividends from any mutual fund in your SEPP. All of these should go into a money market fund in your SEPP IRA and should never come directly to you. If this were to happen, you should contact your custodian immediately, tell them what happened, and have them straighten it out. Taking such an erroneous distribution would bust your SEPP, since you can only take the exact amount calculated in the original SEPP setup.
I have found that having cash in a money market fund in my SEPP IRA works REALLY well. I have all fund interest, dividends, and annual distributions paid to the MM fund. My SEPP distribution payments all come from the MM fund. I maintain about 15% of my portfolio in the MM fund so that market swings do not have much impact. Since starting my SEPP in March 2005, I have not had to sell any shares to meet my SEPP distributions. In a rising market, this is no big deal. In a falling market it is.Ed2008-07-29 09:58, By: Ed_B, IP: [126.96.36.199]
L2: Question about CustodiansJackie:
One further comment I would make is to keep excellent records for everything you do regarding your SEPP. I have a 3″ 3-ring binder that contains every scrap of paper that ever had anything to do with my SEPP. It is divided into sections for papers of certain kinds and is chronological from front (newest) to back (oldest). I also have copies of web site printouts from the 12/31 value of my account, starting with my 401k and going through all of the years that I have had a SEPP IRA. All correspondencewith my custodian and the IRS is also kept here. I also make scans of various papers and keep downloaded info on my PC so that I have a complete record of everything that has ever been done with my 401k and SEPP IRA. Should the IRS ever challenge the validity of my SEPP, I will have all of the documentation necessary to successfully defend the creation and operation ofmy SEPP. I hope that this will not be needed but if it is, the data will be available and in a form that is easy to use.
2008-07-29 10:07, By: Ed_B, IP: [188.8.131.52]
L2: Question about CustodiansThanks to all who replied – I really appreciate it.
Ed your answers were xtremely helpful, I”d seen previous posts (from you?) talking about keeping meticulous records — always good advice. Your idea of keeping a MM cushion for distributions was exactly what I was planning. Thanks for the SEPPlink atVanguard.
To be clear to Jim, I didn”t say liquidate ALL of my investments in that account to cash.I was just assuming that ifthe cash/mm balance wasn”t sufficient to make a scheduled distribution, the custodian would liquidate equities, and most likely not the ones I”d choose. It”s a few practical nuts & bolts like this that I”m researching. This SEPP would contain less than 20% of total qualified retirement funds, and wouldbe used to augment my husband”s pension and our non-qualified investments.
Thanks again.2008-07-29 10:51, By: Jackie, IP: [184.108.40.206]
L2: Question about CustodiansCustodians of SEPP 72-T accounts should never “liquidate equities” without discussing the choices with you, and you should never put yourself in the position that you have not planned ahead to have the cash available for each distribution. If YOU fail to plan, don”t blame the custodian because it”s YOUR FAULT.2008-07-29 12:19, By: dlzallestaxes, IP: [220.127.116.11]
L2: Question about Custodians
Wow! I feel like I missed something. I thought planning was what I was trying to do now, and I don”t recall blaming the custodian for anything. 2008-07-29 13:27, By: Jackie, IP: [18.104.22.168]
L2: Question about CustodiansSorry, I was only quoting from your last posting where you said “If I don”t have enough cash, the custodian would liquidate my equities, andhe might not choose what I would have.”
If you plan, then you should have enough cash. By planning, I mean to calculate your cash income and cash balance that will be available x days beforeall distributions are to be made. Then there would be no need for a custodian to sell anything.2008-07-29 14:09, By: dlzallestaxes, IP: [22.214.171.124]
L2: Question about CustodiansHi, Jackie:
You”re most welcome to any info I can share about personal finance, investing, and retirement. I well remember how new I was to all this just a few short years ago and how several of the really great people on this web site did a lot to help me along. If I haven”t thanked them for all their help, I do so now with thanks and appreciation to Gordon, Alan, TheBadger, Jim, Ken, Dlz, and others who have been so selfless with their thoughts and experience. Anything I can do to pay this community back for that assist is freely and happily given. 🙂
Ed2008-07-30 07:52, By: Ed_B, IP: [126.96.36.199]
L2: Question about CustodiansGood morning Jackie:
I can”t tell for sure from you post exactly how your assets are positioned with the custodian, so let me just talk about the two methods you may use for your situation. Your choices are 1) Brokerage Platform into which you may have individual stocks, bonds, sometimes annuities, REIT”s and of course mutual funds, and 2) Direct Platform where you only have mutual funds with one fund family, REIT”s and maybe some other unique things.
The Brokerage Platform is the most flexible since you can put just about anything in it. But, as DLZ was talking about, it also has the most moving parts and requires the most attention. Distributions typically come out of the Money Market Fund within the account, and you have to be sure there is enough money each month, quarter, etc for the correct distribution. You may have standing orders to liquidate specific assets to fund the MM Fund, or you may choose to make the trades / liquidations of your choice each time MM funding comes around. If you use the standing order method, be sure to have an alternative asset to liquidate in case the primary is insufficient. If your MM Fund is insufficient for one distribution and there are no standing orders to liquidate an alternate, then you”ll have a short distribution. Regardles of how you choose to run this railroad, it”s your responsibility to keep it on the tracks and running smoothly. Any changes must be in writing. Expect some amount of transaction charges which can add up pretty fast.
The Direct Platform is the simplest and least likely to cause problems. Let”s say you have a portfolio of five (5) Vanguard funds in one account. When you set up the SEPP Distribution Request on their form, you can designate which of the funds to liquidate, or you can liquidate proportionally from all funds to make your distributions. They will EFT the funds directly to your checking account on a specific day of the month or whatever your frequency is. Any changes can usually be handled with a phone call on a recorded line to the Customer Support Center, or they may require written change instructions. There probably won”t be any transaction charges unlike the Brokerage Platform.
Both systems will work, but you need to understand what”s required to make each operate. I have found the Direct Platform to be more cost effective and easier to operate with my clients.
Hope this helps.
PS: Both methods can either send you a paper check (not recommended) or EFT / ACH the funds directly into your checking account (recommended).2008-07-30 08:28, By: Jim, IP: [188.8.131.52]
L2: Question about CustodiansAn additional point — Except for December”s distribution, if you have a “shortfall” on any other distribution, you can make it up in the next distribution, or by taking a supplemental one, when additional income is received, or you sell something in the SEPP 72-T.
The problem with December is that you might not have time to get the extra payment to cover the shortfall before 12/31, depending when you find out about it.
The important aspect to understand that only the ANNUAL DISTRIBUTION TOTAL must be in accordance with the calculated amount. The way in which you are at distributing that total is immaterial to the IRS.2008-07-30 11:59, By: dlzallestaxes, IP: [184.108.40.206]