SEPP at Vanguard
L1: SEPP at VanguardWe started a SEPP at Vanguard in August of this year and are still trying to figure out how to invest the money. With interest rates so low we are hesitant to put any of it in a bond fund. (Don’t want to lose money when the rates go up since there is really no where else for them to go.) VG’s cd and money market fundrates are dismal. We can get better rates at our credit union. Does anyone know if there is a way to split up the funds in one existing SEPP so that some of the funds are in mutual funds at VG and some of it is in a credit union? Thanks!2010-09-10 14:22, By: corporate orphan, IP: [126.96.36.199]
L2: SEPP at VanguardIf you used a custodial or brokerage account at Vanguard and the agreement allows an investment in a credit union, there is no problem – merely move the funds to the credit union as part of the brokerage account.
Ifyoudidn’tusethat type of account, then you would be doing a partial transfer which may cause other problems.2010-09-10 14:29, By: Gfw, IP: [188.8.131.52]
L3: SEPP at VanguardThat’s great news! Thanks for replying so quickly. Now all I have to do is convince my husband. Do you have any references I can cite when I try to explain to him? He was a CPA and usually needs to read the regulations before he is convinced he can do anything when it concerns the IRS. 2010-09-10 14:35, By: Corporate Orphan, IP: [184.108.40.206]
L4: SEPP at VanguardThere are no regulations as such.
The magic to a brokerage account is that all account assets are merely treated as investments under one IRA account number and as such can be reinvested at will as long as the investment is an OK IRA investment.2010-09-10 14:38, By: Gfw, IP: [220.127.116.11]
L5: SEPP at VanguardThanks again for the quick reply and thanks to the people who set up and maintain this site. It has by far been the most helpful resource we found when setting up our SEPP.2010-09-10 14:47, By: corporate Orphan, IP: [18.104.22.168]
L6: SEPP at VanguardWhile your basic premise about bond fund (and all fixed-interest investments)price and interest rates going in opposite directions is correct, most of the time that occurs significantly for 10 year or longer term funds. If you want the diversity of bond funds, then consider short-term and intermediate term ( up to about 5 years) funds.
However, if you have significant amounts to invest, then consider buying specific bonds in amounts of $ 5,000, $ 10,000, and $ 25,000. with specific maturities. If you had $ 300,000 for example to invest, you could divide it up into 12 to 60 different securities.
Another approach would be a CD Ladder, with maturities for example every 3 months over the next 2-3 years. That way when they mature, you can reinvest at the expected/hoped for higher interest rates available at that time.
Also, I saw a recent article that indicated that there are numerous QUALITY companies whose DIVIDENDS are 4% or higher, including utilities. There are also Cumulative Preferred Stocks as an option.
All of these would be purchased in a Vanguard Brokerage account.2010-09-10 15:07, By: dlzallestaxes, IP: [22.214.171.124]
L7: SEPP at VanguardThanks for the suggestions. We have considered the short and intermediate bond funds but the duration on them has kept us from investing (2.2 for a short term). If interest rates go up 1 percent then it will take 2.2 years to make up the amount you lose We are looking for a safe place to put the 5 years of SEPP payments so that the money is there when we need it.
BTW we talked to VG and they said “no” on the credit union CD They will only handle brokerage CDs which right now are paying less than the credit union.2010-09-10 21:13, By: corporate orphan, IP: [126.96.36.199]
L8: SEPP at VanguardInstead of talking in generalities, I suggest that you give specifics as to your Date of Birth, amount in your IRA account(s), cash needs for 2010 and future years, etc. so that we can see if we have any other suggestions.
Also, other resources, current income situation, 2010 taxable income or bracket, unrealized capital gains in non-retirement accounts, etc. Are you retired ? Spousal situation, and her income situation ?2010-09-10 21:29, By: dlzallestaxes, IP: [188.8.131.52]
L9: SEPP at VanguardNot surprised with the limited CD options at Vanguard. This is also true of Schwab and Fidelity. I don’t think you could find a brokerage custodian offering CU CDs or any small banks for that matter.
Generally, the banks offering brokerage CDs seem to be large banks in need of funds and those on the FDIC watch list. I had 4 such CDs over the last 2 years that failed and fortuneately all 4 balances including interest to date of takeover were restored to the brokerage account within 20 days at the worst. But I still not did find the brokerage CD rates to be all that competitive and just bought them to avoid dealing with additionalIRA custodians.
Particularly with a 72 plan, you want to keep custodians to a minimum and if you want safety as well, best to use a larger firm brokerage account and accept that CDs will probably not work that well compared to the other alternative mentioned in prior posts.2010-09-10 22:45, By: Alan S., IP: [184.108.40.206]
L10: SEPP at VanguardI have a Vanguard IRA with a SEPP running on it, and I have bought mutual funds (like T Rowe Price offerings, and actual stocks) outside what Vanguard offered in their own funds, so that is an option. Never checked to see if I could buy CD’s thru them. I also manage a taxable account (for my mother) with Schwab, where I had a similar experieceto Alan’s, in that I purchased some laddered CD’s in about 8 banks, and 2 of those banksfailed, and the account was replenished at face value shortly after the failure in each instance. Finally, the person to thank for the site is GFW, (Gordon Weiss) who was also the first one to respond to your question. KEN2010-09-11 03:34, By: Ken, IP: [220.127.116.11]
L9: SEPP at VanguardThanks for the offer but the rest of our portfolio is not our concern. right now We have put most of the SEPP and our other funds in investments that we feel comfortable with. Mostly in funds that we don’t plan to touch for 10 years so hopefully, we don’t have to withdraw from them when they are down. We just wanted the 5 years of required distributions to be in something safe so that it would be there when we needed to withdraw it. The money market at VG is getting .04% return. A one year CD is at .45%. The money market at our CU would be at least 1%.
We have been looking at the VG GNMA fund (which is currently returning 3.5%) and the short term bond funds but fear if interest rates go up just 1%, it will be 2.5 years or more before we get our money back from a downturn. When we talked to one guy at VG he actually told us “there was no free lunch.” So he saw nothing wrong with us basicallygiving VG $125,000 for free for a while. Enough of my ranting…. bottom line its hard to invest right now if you need the money within 5 years.2010-09-11 14:47, By: corporate Orphan, IP: [18.104.22.168]
L10: SEPP at VanguardOh, with all my ranting I forgot to thank Gordon Weiss for the site. Thank you!2010-09-11 14:49, By: corporate Orphan, IP: [22.214.171.124]
L2: SEPP at VanguardI’m currently in the planning stage for a SEPP and have had similar concerns. I talked to my local CU and explained what I wanted to do, and how the calculations would be performed. They said that they could give me a special deal if I opened a 3-year IRA CD for the SEPP (paying 2.5 %). They would allow penalty-free withdrawals from the CD each year for the annual SEPP distribution, and they would encode the 1099Rs with code 02 to boot. When the CD matures I would have the option of renewing it or transferring the IRA to another custodian. My only hesitation is that I would probably be locking-in a bottom rate if I did this now.
So you might want to talk to your CU to see if they could be as accommodative.2010-09-11 15:34, By: kepler, IP: [126.96.36.199]
L3: SEPP at VanguardWould the CU hold the funds of the entire SEPP? This is what we would like to do but the people we talked to at VG made it sound like we couldn’t do it. I wonder if we talked to the wrong people who didn’t really know. We had someone from VG once tell us it was “illegal” for them to code the 1099R with a “02” so they don’t help with the calculations.2010-09-11 16:44, By: corporate Orphan, IP: [188.8.131.52]
L4: SEPP at VanguardHas anyone ever been asked for a copy of their birth certificate when opening a SEPP 72-T. If not, then how does the company know that you are giving them your correct age, and when you will really be 59 1/2 ? How do you prove to them that you do not have any other IRA accounts that you are including in your SEPP UNIVERSE, but not telling them about ?
The taxpayer is responsible for all of this info, and the calculations, not Vanguard, Fidelity, or anyone else.
I doubt that most Credit Unions are used to handling SEPP 72-T plans, and you will have to be extremely careful to make sure that you get the correct distribution by 12/15 in case you have to get any over or under distribution corrected. And you would have less recourse for an error with a Credit Union than with brokers and mutual fund companies.
I’m not sure that the difference in interest income is worth the potential exposure.
P.S. I’m not sure where you are getting a calculation that a 1% increase in interest rates will take you 2.5 years to recover the loss in value. Short to mid-term fixed interest investments have a much smaller effect than long-term ones. By the way, early distributions of CDs before maturity have penalties similar to the changes in market value.
P.P.S. If you have significant other investments outside of your retirement accounts, then why are you setting up a SEPP 72-T at all ? Why not use these non-retirement funds to supplement your cash needs. Possibly selling some “losers”, and maybe taking gains at 15% rather than the projected 20%.2010-09-11 17:08, By: dlzallestaxes, IP: [184.108.40.206]
L4: SEPP at VanguardIn my case Vanguard is not involved. My CU would be the IRA custodian. I would open a traditional IRA 3-year CD with them and fund it with a direct transfer of $250,000 from my 401K (this is the maximum insured amount). This is all I need for now. If I need more later on I could create a second SEPP universe with one or more other IRAs.2010-09-11 17:18, By: kepler, IP: [220.127.116.11]
L5: SEPP at VanguardKepler Are you retiring in 2010 ? Will you be 55 by 12/31/2010 ? If so, then you may not even need a SEPP 72-T.
Is there any company stock in your 401-K ? If so, then ask your company for that cost basis, and look into the tax provisions for NUA ( NET UNREALIZED APPRECIATION in company stock in retirement palns). It could save you thousands in taxes, and eliminate the need for a SEPP 72-T.2010-09-11 17:53, By: dlzallestaxes, IP: [18.104.22.168]
L6: SEPP at Vanguarddlzallestaxes: I’m 53 and retired. I’m familiar with the issues you asked about and they don’t apply to me. I’ve been monitoring this great site for years and have read the Practical Guide many times over. I have established the need to start a SEPP in Jan 2011, and was able to get the special deal from my CU (penalty-free distributions from a 3-year IRA CD at 2.5%, and 1099R coded 02) after convincing the CU IRA gurus in the back offices that I knew what I was talking about, and after I said that a tax accountant would review and approve my SEPP plan.
This is one of several options I am considering. I see this as a low-risk option for me because the funds are insured for at least 3-years, the interest rate is reasonable, the principle is not at risk, and I’ll be taking one fixed SEPP distribution annually every January. I also like discussing the details face-to-face at the CU rather than by long-distance phone calls to another city.
I know that the vast majority of CUs would not offer such terms. My intent here is to just point out that if you do your homework, and negotiate as a knowledgeable customer, then who knows what kind of deal you might get.
2010-09-11 20:44, By: kepler, IP: [22.214.171.124]
L7: SEPP at VanguardKepler,
Sounds like you might have an unusual situation with this CU, and it sounds like a go. Hopefully, if this CU office only has one staffer that understands 72t rules, hopethat the person will remain there as long as they are your custodian. The key is that you will be able to take your January distribution each year with no early withdrawal penalty from the CU CD.
The 1099R exception coding is a plus, but not critical since you can always file a 5329 to claim the exception. I am not sure how CUs handlethat small membership fee but be sure it is NOT part of the IRA in case you decide to move the account after 3 years. Also, it is best to clarify that you can get a direct transfer after 3 years so you do not have to use up your one rollover permitted moving the funds yourself to another IRA custodian.2010-09-12 00:01, By: Alan S., IP: [126.96.36.199]
L7: SEPP at VanguardIt sounds like you have researched well, and are knowledgeable.
Too often we get psotings from people who say they understand everything about SEPP 72-T, but ion fact they really do not have a clue.
Also, some people plan to go into, or have already gone into, a SEPP 72-T when they had other, better options, such as 401-K distributions > 55, or NUA employer stock in their company-sponsored retirement plan.
Your starting Jan 2011 indicates that you have done tax planning for 2010, and financial planning for future years. If you want to supplement your income, you seem to be well qualified to be an advisor on SEPP 72-T plans in your area !!!!
GOOD LUCK.2010-09-12 02:17, By: dlzallestaxes, IP: [188.8.131.52]
L8: SEPP at VanguardIf the original poster is looking for options for investing in the Vanguard universe, I highly recommend the Bogleheads forums: http://www.bogleheads.org/forum/index.php.
These are moderated forums primarily, but not exclusively, for Vanguard investors. They are NOT affiliated with Vanguard. Join and ask a question, or just browse. You will find a treasure trove of thoughtful analysis by ordinary people who are their own financial advisers. There have been a large number of posts about the so-called “bond bubble” recently. No agreement, but lots of food for thought.2010-09-12 04:55, By: Eureka, IP: [184.108.40.206]
L9: SEPP at VanguardTHanks for the suggestion about Bogleheads. I have been reading it and that’s what has caused our indecision on what to do with the “safe” part of the SEPP money. The posts on there have been informative but not very reassuring.
We were all ready to put it the VG GNMA or short term bond funds (plus a year’s worth of distributions in a money market fund.)2010-09-12 21:06, By: corporate Orphan, IP: [220.127.116.11]
L10: SEPP at VanguardIt’s harder to predict interest rates than it is to predict the stock market. Bob Brinker, syndicated talk-show host and a longtime fan of the Vanguard GNMA Fund, has recently advised those worried about GNMA NAV decline to establish a “mental stop” at which they will sell the fund. He has suggested $10.90. The problem then, of course, is trying to figure out where to put the money.
This is a really hard time for fixed-income investors. Believe me, I know. Keep in mind, though, that while an intermediate-term bond fund could show a relentless decline in price in a climate of steadily rising interest rates, the decline won’t be anything like what stock investors have experienced in the past decade. Reinvesting dividends will blunt much of the impact of a price decline.
I would avoid long bonds right now. If we have another Great Depression, don’t forget to tell me I was wrong.
Cash yields are awful, but the money is there and inflation is extremely low.2010-09-13 07:23, By: Eureka, IP: [18.104.22.168]