L1: Question, pleaseHello, i have to continue my plan past 59.5 to meet the 5 year rule. At Schwab, there are 2 choices to choose and one is normal distribution, aand the other is distribution, exception applies. So after 59.5, which choice to I pick? They know my age, so should I pick normal dist and then fill out the 5329? Please explain what codes I could get and how to deal with each on my tax returns for 72t plans post 59.5, thanks!!!!2012-08-08 02:53, By: Tmorg, IP: [188.8.131.52]
L2: Question, pleaseYou and/or Schwab are confusing 2 different provisions of the tax code.
1. For your SEPP 72-T, you must continue the same annual distributions until the later of 60 months or age 59 1/2. In your case it must continue until after 60 months of your first distribution.
2. After you complete your SEPP ( after the 60 months), you do not have to take ANY distributions until you are 70 1/2, at which time you start your RMD ( REQUIRED MINIMUM DISTRIBUTION).
We could pay off our national debt by fining the brokerage houses for their incompetence in explaining taxes involving retirement plan distributions to taxpayers. Since many of them, or their employees are clueless, I suggest that you speak to a tax professional.2012-08-08 04:53, By: dlzallestaxes, IP: [184.108.40.206]
L3: Question, pleaseI’m a bit confused by your post and you having to “choose” between two different distribution codes. The IRS Code requires the IRA Custodian to assign a distribution code based on specific guidelines. Youare not supposed tohave a choice.
For all distributions before you reach age 59 1/2 the custodian will either issue a Code 1, Early distribution, no known exception or Code 2, Early distribution, exception applies. Beginning a few years ago based on some IRS rulling or writing … in either case it was about as clear a mud … most custodians began issuing Code 1 to everyone which dictated that the taxpayer file IRS Form 5329 to claim the exception. Some continued to issue Code 2 which was nice and didn’t require filing Form 5329.
For all distributions AFTER you reach age 59 1/2, the custodian is supposed to issue the “Normal Distribution” code. Consequently you should receive two separate Form 1099-R’s for the year you turn age 59 1/2, each indicating the appropriate code for each type distribution.
I did find one custodian continue to issue Code 2 for one of my clients who started a SEPP Plan at age 53 and continued taking the same distribution amount past age 70 1/2 when his RMD’s had to start. (I only found out about this situation when the client called me at his age 72 because his tax preparer had raised the question.) When I questioned the custodian their repsaid they didn’t make changes until requested to do so. So I requested the change immediately. Fortunately this is an isolated case and I quit using that fund company several years ago for other reasons.
The bottom line is that you must be on top of things and monitor what’s going on since it is YOUR plan and not someone else’s. YOU are responsible to get your taxes right, regardless of the advice you receive from whatever source.
Jim F2012-08-08 14:03, By: Jim F, IP: [220.127.116.11]
L4: Question, pleaseI always take one distribuition per year in earlyJan, so I will getmyusual code 2the year I turn 59.5 which is July 26, 2013. So, in Jan 2014, when I log into Schwab for my yearly dist, there will be I think 3 choices…normal dist, dist acception applies, and dist penalty applies…not exact wording but you get the idea. I see these choices every year when I do my dist. So my original question ( I apologize if it was not worded right) was do I pick normal dist on the choices because Ifigure Schwab is oblivious that I am doing my own SEPP, or do I pick normal dist acception applies. Or does it matter, because they know my age and will give me a code 1 no matter which box I check? I just wanted to know which box to check on the online request.2012-08-08 15:15, By: tmorg, IP: [18.104.22.168]
L5: Question, pleaseObviously from my last post I am not familiar with the Schwab system. Now I understand your question.
Any distributions you take BEFORE your ACTUAL age 59 1/2 with your active SEPP Plan should be “Early Distributionwith Exception.”
Any distributions you take AFTER your ACTUAL age 59 1/2, even though you haven’t completed the SEPP Plan requirements, will be “Normal Distributions.”
This is nice that you can designate the distribution code and not have to worry with IRS Form 5329.
Jim F2012-08-08 15:24, By: Jim F, IP: [22.214.171.124]
L6: Question, pleaseJim F,
Now I’m confused. Wouldn’t he still have to fill out the 5329 including the year in which the 60 months completes the SEPP requirements?2012-08-08 15:40, By: Scott, IP: [126.96.36.199]
L7: Question, pleaseScott:
IRS Form 5329 isONLY used to claim the exception when the custodian issues a Code 1, Early Distribution, No Known Exception. If the custodian issues Code 2, Early Distribution with Exception, there is no need to file IRS Form 5329.
OK, someone is going to point out thatForm 5329 is used for other things but this discussion is about 72(t).
Jim F2012-08-08 15:46, By: Jim F, IP: [188.8.131.52]
L8: Question, pleaseOk, I know I will get a code 1 now. So back to the original question …..which box do I check after 59.5….normal dist, or dist acception applies? I know myself it will still be a SEPP at that point, but doesnt Schwab just see the age only…and will see I am past 59.5 and give the code 1 even though I choose the box dist acception applies?2012-08-08 15:57, By: tmorg, IP: [184.108.40.206]
L9: Question, pleaseThe question that you are asking can only really be answered by Schwab.
You are asking how to fill out their forms, not really a question about your SEPP.
Have you tried calling Schwab and asking them what information they are looking for?2012-08-08 16:03, By: Gfw, IP: [220.127.116.11]
L10: Question, pleaseOK, I just called schwab. They said to pick normal dist after 59.5. And I will get a code 1, requiring me to fill out 5329 for the first time, as I have always recieved the code 2 before. Does that make sence?2012-08-08 16:30, By: tmorg, IP: [18.104.22.168]
L11: Question, pleaseI don’t have the code table in front of me but I think the “Normal Distribution” is Code 7 which should occure after age 59 1/2. So I don’t understand why they said you would get Code 1.
Jim F2012-08-08 16:36, By: Jim F, IP: [22.214.171.124]
L12: Question, pleaseBECAUSE THEY DO NOT HAVE A CLUE !!!!
They are obviously oblivious to the fact that once you pass the 60-month period ( after reaching 59 1/2), your SEPP 72-T plan is in effect terminated. Any distributions before that date are code 1 distributions because an exception exists — your SEPP 72-T plan. Code 2 is used for “Early Distribution, exception applies, UNDER AGE 59 1/2 !!!” After age 59 1/2, the distributions are code 7.
There may be another explanation, which might be communication. The code 1, 2, or 7 refers to the code on the form 1099-R from Schwab, which Schwab sends to the IRS and the taxpayer. But, code “02” is the designation on the form 5329 to designate ” A distribution that is part of a scheduled series of substantially equal periodic payments made over the life expectancy of the participant ….. in a Qualified Plan or IRA.” This code 02 denotes the “exceptions to the 10% withdrawal penalty before age 59 1/2.” Form 5329 is filed by the taxzpayer with his tax return.2012-08-08 17:52, By: dlzallestaxes, IP: [126.96.36.199]
L13: Question, pleaseSchwab used to be one of the few custodians that would issue a 2 code for SEPP plans. In any event, the only reason for a custodian to use Code 1 for post 59.5 distributions is that they think you have violated your plan. Otherwise, the 1099Rshould becoded 7.
You would not use a 5329 to change a code other than Code 1. So if you get a Code 2 for distributions prior to 59.5 and a Code 7 for post 59.5 distributions, there is no need to file a 5329 at all.
As long as you don’t violate any 72t requirement in the process, in the year you reach 59.5 if you take your distributions before that date, then you only have one 1099R to deal with on your tax return.2012-08-08 23:06, By: Alan S, IP: [188.8.131.52]
L14: Question, pleaseAlan, in response to your post. In the year you reach 59.5, if you make one distribution for the year, before the date you turn 59.5, shouldn’t Schwab issue a code 2 because you requested it before age 59.5?
Another question, so if you are still in a SEPP plan after age 59.5 and get a code 7. You do not have to fill out the 5329 , just keep following the rules by taking out the exact amount required? The IRS wouldn’t question thelack of a form 5329when they know you are still in a SEPP series?2012-08-09 14:57, By: tmorg, IP: [184.108.40.206]
L15: Question, pleaseAfter you reach 59 1/2 and 60 month period, there is no requirement to continue taking the same or any distributions.
You only have to fill out a 5329 if the 1099-R is coded “1” because the company is telling the IRS that they are not taking the responsibility for indicating the an exception applies (which would be code “2”), and therefore your filing a 5329 is documentation that you are taking the responsibility of notifying the IRS that an exception does apply, i.e. your SEPP 72-T plan.2012-08-09 16:29, By: dlzallestaxes, IP: [220.127.116.11]
L16: Question, pleaseI would bet that the IRS doesn’t keep up with a five year plan still in progress after 59.5, like in year 60 0r 61 . What I am saying is that if you get a code 7 after 59.5, the IRS sees that as “normal distribution” . So it sorta slides past in the system. But one still must remain viligant to follow the 5 year rule to the letter. Is this a totally wrong assumption?
My 59.5 date is Jan 26, and I normally take my one time a year dist, on Jan 3. So I am debating whether to wait till something like March ( and surely get thecode 7)so as not to take a chance of getting a code 1 if I take it just a couple of weeks before my 59.5. What do you think?2012-08-10 15:45, By: tmorg, IP: [18.104.22.168]
L17: Question, pleaseI would bet that you bet wrong – the IRS has some pretty good computer systems and they also know your date of birth.2012-08-10 15:48, By: Gfw, IP: [22.214.171.124]
L17: Question, pleaseIf my math is correct, you were born 1/26/1955, and as you stated will be 59 1/2 on 7/26/2014.
You mention your SEPP 72-T plan, but have not yet told us the date of your 1st distribution. That date is critical, because many people incorrectly think that their plan ends when they take their 5th annual distribution in the 49th month. You must wait until after the 60 month anniversary of the initial distribution.
GSW — I doubt if the IRS even keeps track of the existence of SEPP 72-T plans. I do not remember any instances of the IRS correcting a premature termination of a SEPP 72-T at age 59 1/2 before the 60 month period. The IRS has no record of the date of the initial distribution, nor the dates of the distributions after 59 1/2. I know that they do not keep track of ISO’s, and the regular vs AMT cost basis nuance for capital gain reporting.2012-08-10 16:15, By: dlzallestaxes, IP: [126.96.36.199]
L18: Question, pleaseNo, I will be 59.5 Jan. 26, 2013. My first dist. was Sept 1 2009 in a single dist, only one taken per year on Jan 3 each year. I will take my final yearly SEPP payment on Jan 3, 2014. Then will not take another dist ( any amount I want )untill sometime in 2015.
I am debating about whether to delay my payment in 2013 till like March so I would safely get the code 7. It would be past my 59.5 mark. Whereas if I take it on Jan 3 like I have done in the past, being so close to 59.5 on Jan 26, I fear they might give me a code 1. I would rather get the code 7.
dlzallestaxes, you make the point about the Irs not keeping up with post 59.5 that I was trying to convey in my previous post, I just didn’t convey it as well. So what do you think about my plan as stated above?2012-08-10 18:11, By: tmorg, IP: [188.8.131.52]
L19: Question, pleaseIn one of your previous postings you replied that you will be 59 1/2 on July 26, 2013. I think that is correct, if you meant to say in your last posting that you will be 59 on Jan 26, 2013. Please clarify your inconsistency because if you will be 59 1/2 on Jan 26/2013 it makes a difference. Giving us your date of birth will be helpful.
Either way, you must take your 5th annual distribution during 2013. Your SEPP 72-T plan will not terminate until 9/1/2014 even though you will have taken 5 annual payments in 2009-2013, and will be 59 1/2 on 7/26/2013 (or 1/26/2013). It terminates 60 months from the first distribution of any amount.
You have numerous options in 2014, including not taking any distribution. See the website or relevant postings for details. Do some tax planning with your accountant or financial advisor for 2014.2012-08-10 18:28, By: dlzallestaxes, IP: [184.108.40.206]
L20: Question, pleaseSorry for the confusion. My Birthdate is 7/26/53. Yes, my plan terminates on 9/1/2014. I was under the impression I had to either take a full yearly SEPP pmt before 9/1/2014, or a pro-rated amount equal to8 months worthif divided out . But I was not aware that I could not takeanything at all in 2014, I do not understand that. Could you point me to the details on this? I have studied your wonderful site for years. Wow, I missed this.2012-08-10 18:56, By: tmorg, IP: [220.127.116.11]
L21: Question, pleaseSo you’ll be 59 1/2 on 1/26/2013. You have to take your 5th annual amount of distributions during 2013, either 1 payment as you have been doing, or monthly like many people do. That doesn’t matter.
But the amount taken in the first calendar year is what matters to those who take a prorata amount in the first calendar year (rather than the full annual amount that you took). For those “prorata” people, they have to take the balance of their 60 months worth of distributions during the last calendare year of the plan. If you had taken 4 months’ worth in 2009, and 4 full years in 2010-2013, then you would have to take either 8 months’ worth in 2014, or you could take a full year’s worth.
Since you will have already taken your 5th years’ worth in 2013, your plan will end 1/26/2014, and no payment will be REQUIRED in 2014. You can take -0- or any amount that you want after 1/26/2014, but we suggest waiting at least until after 2/1/2014 to avoid complications in coding.2012-08-10 19:29, By: dlzallestaxes, IP: [18.104.22.168]
L22: Question, pleaseThanks so much for the explanation. You said “but we suggest waiting at least until after 2/1/2014 to avoid complications in coding.” Since I will be well past 60 by Jan 2014, wouldn’t I get a code 7 under all circumstances?2012-08-10 19:47, By: tmorg, IP: [22.214.171.124]
L23: Question, pleasetmorg
Just my opinion, but…
I think you are totally over weighting the meaning of the code you receive on your 1099, it really means little. It certainly doesn’t mean that you won’t get audited or that you are free and clear.
In some respects, you might actually be better off getting a code of 1 and filing a form 5329. At least the IRS then knows that you are watching your plan. And next year, your IRA Trustee/Custodian may change like most others and start giving yo a code of 1.2012-08-10 20:15, By: gfw, IP: [126.96.36.199]
L24: Question, pleaseDlz,
If this plan started on 9/1/2009 he cannot do anything he wants after 2/1/2014. He must wait until 9/2/2014, or do one of the following prior to 9/2/2014:
#1 Take the annual full amount
#2 Take a pro-rated amount
#3 Take nothing at all (allowed in the last year of plan)
Do anything other than the above mentioned 3 prior to 9/1/2014 and the SEPP would be busted?2012-08-10 21:10, By: Scott, IP: [188.8.131.52]
L25: Question, pleaseWhen using the 5 year plan and assuming that he has taken 5 annual distributions, the plan will end on 09/01/2014 and the first modification date will be 09/02/2014.
Nothing more than, or less than, should be taken other than the 5 annual (or 60 times the monthly) payments prior to 09/02/2014. Taking any more is the exact issue that was dealt with in Arnold v Comm in 1998 – that ruling defined the 5-year rule and when a plan using the 5-year rule can end.2012-08-10 21:20, By: Gfw, IP: [184.108.40.206]
L26: Question, pleaseGfw,
So if he took a pro-rated distribution of 4 months in 2009, my statement is incorrect? He would still have to take 8 months in 2014. However, if he took the full annual amount in 2009, I am correct.
Thank you for pointing this out.2012-08-10 21:45, By: Scott, IP: [220.127.116.11]
L27: Question, pleaseIf he took an annual in 09/2009 and then started annual distributions on 01/03 of each year, he will have taken the five annual distributions, but should take no more than 5 annual payments until after 09/01/2014.
A pro-rata distribution in the 1st year would result in a pro-rata distribution in the final year. Both scenarios can be viewed using our calculator. 2012-08-10 22:06, By: Gfw, IP: [18.104.22.168]
L28: Question, pleaseOk, guys. I plan on taking the same dollar amount as I had been taking under the plan on Jan 3, 2014. Is that ok? GFW, you are telling me I cannot do that? I will need this distribution to live on.2012-08-10 22:17, By: tmorg, IP: [22.214.171.124]
L29: Question, pleaseYour concerns were centered on the wrong thing, your 1099 code. They should have been centered on the differences between a 5-Year SEPP and a SEPP that ends at age 59.5, and there are differences.
Arnold also said that he needed the additional funds – the IRS said that it was a material modification and the tax court agreed. In that case (even though withdrawals are taxed on an annual basis) the IRS seemed to use a fiscal year starting with the date of the first distribution and again, the tax court agreed.
You may want to do a search on “Arnold v. Comm., 111 TC No. 12 (1998)” and then talk to your tax advisor.
Earlier you were betting on what the IRS may or may not be aware of. I wouldn’t suggest that you do that – you best make sure – the penalties and back interest can be pretty stiff. Whether or not you are will ing to take the risk knowing the potential consequences is really up to you.2012-08-10 22:30, By: Gfw, IP: [126.96.36.199]
L30: Question, pleaseI want to do the right thing, and strictly follow the law. I must forget about worrying about the codes. I will read the case you refer to. I will not take a 2014 dist till after the SEPP plan is over. I have emergency money I can tap.2012-08-10 22:39, By: tmorg, IP: [188.8.131.52]