SEPP IRA Distribution Error
L1: SEPP IRA Distribution ErrorI started my 72t SEPP program on 3/15/2005 at age 55.5. My IRA is with Vanguard, with whom I have invested in a taxable account for several years.
I recently got quite a shock when I received a letter fromthem that I thought might be info on a new fund or perhapssome routine info about my account. Instead, it turned outto be a dividend check from the GNMA fund in my IRA!
I contacted Vanguard via email right away to request thateither this check be voided and the money put into theVMMXX money market fund in this IRA or that my next quarterlydistribution from this account be reduced by an equal amountso that my annual distribution amount would be unchanged. Idid not know which of these would work better, so left thatto them. They responded quickly by saying that they were reviewing this issue and would get back to me as soon as possible.
Two days later, I got a call from a very nice lady who explainedthat when my investor class shares were reclassified to admiralclass shares, the previous instruction to send all dividends tothe VMMXX fund did not go along with the new share class. Thiswas a computer programming error.
They decided that the best way to handle it was to void the checkand transfer the dividend into the IRA VMMXX money market fund.I”m satisfied with that option, as I was concerned that receivinga non-SEPP dividend from a SEPP account would bust the plan. Itlikely would have, had I cashed the check and not caught this error.
I asked whether or not they would review their computer systemto remove the possibility of this happening to me again and alsoto other clients with SEPPs. They assured me that they would doso.
Although I am vigilant about anything concerning my SEPP, some folks may not be. Others may be receiving dividends from other non-SEPP accounts. Upon receiving this dividend check, theycould easily think “Ho, hum… another dividend check”, withoutrealizing the threat that this could have to their SEPP.
I am curious about whether or not this would bust a SEPP if itoccurred in December and was not corrected before 12/31. Wouldthis bust the SEPP? It seems to me that it would, although wedo have 60 days to roll back any erroneous IRA distributions. Idon”t know how the end of the year would affect this, if at all. Comments?
Finally, I am happy with the way Vanguard handled this. It wasan unforeseeable computer error with potentially harsh results.I thought that Vanguard handled it very well; courteously, quickly, and professionally.
Ed2008-06-12 16:46, By: Ed_B, IP: [188.8.131.52]
L2: SEPP IRA Distribution ErrorHello Ed:
Your vigilance has saved you. I would suggest that you follow-up your actions in writing to Vanguard or otherwise see the evidence that the right solutions have been implemented.
Lastly, the IRS cares not how or why an extra / additional distribution occurs. It is a modification of the plan.
The Badgerwjstecker@wispertel.net2008-06-12 16:53, By: TheBadger, IP: [184.108.40.206]
L2: SEPP IRA Distribution ErrorBadger:
I understand that the IRS is fairly unforgiving in such matters and it is my goal to keep as low a profile as possible. I”m sure that the less of their time I take up, the better we both will like it! 🙂
I do intend to follow up via watching my account for a few days to make sure that the dividend amount really is deposited into the money market fund. If not, I will be on the phone to see what can be done to expedite this and to make sure that the intended fix is actually implemented.
Ed2008-06-12 17:43, By: Ed_B, IP: [220.127.116.11]
L2: SEPP IRA Distribution ErrorI would give Vanguard, or any company, about 30-60 days to make any correction (except when it might affect the IRS reporting on 1099-R or 5329 forms at year-end). They all have specific internal procedures to make sure that the correction is appropriate, and that they do it properly. There are several levels of supervision they go thru, so give it some time. If you interrupt it mistream it could complicate matters further, similar to becoming impatient with the IRS in correcting their errors.2008-06-13 07:01, By: dlzallestaxes, IP: [18.104.22.168]
L2: SEPP IRA Distribution ErrorGood advice, Dlz. I am keeping a close eye on this and am not too worried aboutgetting an immediate fix. Vanguard is aware of the problem and they are workingon it. They have changed my account such that dividends are no longer mailed tome but are deposited to the money market fund in my IRA. This is what I had askedthem to do originally but that got lost in the share class change. There is no sign ofthe most recent dividend being deposited to the MM fund, though. Could be that they only do that monthly. Once that occurs, all will be well. I do want to be sure that this happens within 60 days, though. I”ll feel better knowing that this issue was resolved within that amount of time.
Ed2008-06-13 08:31, By: Ed_B, IP: [22.214.171.124]
L2: SEPP IRA Distribution ErrorOne final note. I got the notification from Vanguard yesterday that my account had been reset so that all dividends, interest, and annual fund distributions will go into the MM fund in my SEPP / IRA account and that no distributions, other than my calculated quarterly SEPP distributions, will be mailed to me. The MM fund has been credited with the same amount as was inadvertantly distributed to me by check and that check has been voided.
Vanguard has handled this in a way that encourages me to remain a customer of theirs; courteously, quickly, and professionally. Hopefully, they have also resolved the computer programming problem that allowed this problem to occur.
Ed2008-06-18 13:50, By: Ed_B, IP: [126.96.36.199]