Vanguard and 1099,s

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L1: Vanguard and 1099,sVanguard tells me the reason for the 01 code on 1099,s thisyear is that the IRS is now requiring it. Is this true or just their interpretation?2004-12-07 12:48, By: John, IP: [63.195.119.175]
L2: Vanguard and 1099,sSee the post below titled ‘Vanguard insists coding ALL early dist’s as 02′ – it is really their option.2004-12-07 13:16, By: Gfw, IP: [172.16.1.70]

L2: Vanguard and 1099,sJohn,
Read the thread of posts a few days back on same subject… I get the same reply from Vanguard; remember you’re talking to a front-line rep who isn’t intimately familiar with the IRS regs, rather they are telling you V’s POLICY. Go and read the actual IRS instructions to custodians, and they are very clear that SEPP’s are to be coded 2. We have MrBadger to thank for this link, I have learned so much from him and this that I assume is his website. Go to:
http://www.irs.gov/formspubs/article/0,,id=109875,00.html
I confronted Vanguard with this, and the e-mail they sent to me which I included in the thread referenced above and you will see their position in more revealing detail.
I am ticked about their arrogance (they acknowledge they’re aware of the above linked instructions, but are going to code SEPP’s as 01 anyway), but I hadrolled my 401k into V because of their size and low cost, and was going to put up with the code 1 nonsense (and file a form 5329 every year for the next several years). Then I called Fidelity,and find that their policy in fact follows the above referenced1099R instructions: they code SEPP’s as 02, and the other exceptions as01. Then I find that they are now competitive with V on cost, so I am nowclose to a final decision to move my IRA to Fidelity, as soon as I go over the fund comparisons and make sure their products are compatible with my investment requirements.
Rick S2004-12-07 15:31, By: Rick S, IP: [64.160.146.29]

L2: Vanguard and 1099,sI work for a broker-dealer who will be no longer coding SEPP’s as code 2 as of 01/01/2005, and I just thought I would speak up a little for Vanguard, although I do not work for them.
The actual 2004 instructions have:
Use Code 1 only if the employee/taxpayer has not reached age 59_ and you do not know if any of the exceptions under Distribution Code 2, 3, or 4 apply.
under the Code 1 instructions. In light of the the IRS’ change of opinion on this issue, and under advisement of our pension consulting firm, we have decided that it isimpractical for us to say that we know that the SEPP has been adhered to. In conversations with IRS representatives, our pensions consultants have been given the impression that the IRS would like the burden of responsibility for reporting exceptions on IRA to fall more on the taxpayer than the custodian.
I don’t honestly think that Vanguard is being overly cautious and I think a lot more custodians will follow suit in the years to come.
2004-12-07 15:48, By: Dazza, IP: [68.208.8.244]

L2: Vanguard and 1099,sJohn – make sure that you read all the posts in the previous thread. They are NOT required to give you a code of ”2” and in reality should only be using a code of ”2” if they can verify that initially and annually, the plan qualifies under 72(t) or 72(q). They are fully with their rights to give you a code of ”1”. 2004-12-07 15:49, By: Gfw, IP: [172.16.1.70]

L2: Vanguard and 1099,sI have contacted Vanguard but they seem inflexible at this point. What makes me angry is that they helped set up this sepp plan and they have had the funds from the start so they know how much I have taken out and they still refuse to listen .I even offered written documentation.Maybe the 5329 route is my only choice.- John2004-12-07 16:14, By: john, IP: [63.195.119.175]

L2: Vanguard and 1099,sThink about this from the custodian’s perspective: They only know what’s going on with the positions (stocks / bonds / funds / etc) they are holding for you in their capacity as ‘custodian.’Unless they offer a SEPP program and can monitor the established plan and make distributions per that plan, then how can they possibly know if it is in compliance or not to issue Code 2? Unless the custodian has certainty of compliance, they have no alternative but to use Code 1.
My suggestion is to select from the following:
1. Use a ‘brokerage environment’ custodian for your IRA / SEPP so you can put whatever positions you like from stocks to bonds to REITS to mutual funds, etc., into the account. Then the custodian has control of knowing about the distributions.
2. If you want to only use mutual funds and you want to use more than one family, choose a family / custodian that offers a SEPP option, and runindividual SEPPs with each fund family. I have a client doing exactly this and has taken the originally calculated distribution form each fund family each year, and we have changed funds around within each family over time.
When you try to combine two or more custodians into one SEPP plan, you open the door to problems, especially when you start changing distribution amounts among the custodians. Do this and no custodian can legitimately issue Code 2.
I am an independentplanner andI set up my first SEPP in 1995. By following this simple philosophy above,none of my clients have had problems. You have got to use the KISS principal to avoid problems.
Hope this helps.
Jim2004-12-07 16:15, By: Jim, IP: [68.1.157.228]

L2: Vanguard and 1099,sHi John:
Looks like your post and mine hit at the same time. It also looks like your set up your SEPP per my No 2.
It’s possible that we are about to see a change in the landscape and custodians are going to take cover under Code 1 and let the taxpayer prove the exception per Form 5329. Igetthe feeling that until the IRS can be a little more specific about things, custodians may take this position.
Jim2004-12-07 16:25, By: Jim, IP: [68.1.157.228]

L2: Vanguard and 1099,sYes, of course the custodians have a right to code the SEPP’s as code 01.
Especially when reading the current 1099R instructions, it is clear that they should. What stands out to me is that the notice from the IRS dated Aug. 9, 2004 changing the distribution code instructions, where they come right out and specifically say that SEPP’s should be 02, states that the notice of change is a supplement to the 1099R instructions, they are not going to revise the current 1099R instructions.
So if a custodian reads the instructions but not the notice that changes the instructions, they will be coding them as 01.
And certainly, if they read both, I can understand some wanting to play it safe and code as 01 anyway.
I believe the above analysis is why some custodians will still code SEPP’s as 02, e.g., Fidelity has stated they will.
Read the notice of change and tell me what you think:
http://www.irs.gov/formspubs/article/0,,id=109875,00.html
The “Notice of change to 1099R distribution code instructions” is about
two thirds of the way down on the above web page…
Rick S
2004-12-07 19:41, By: Rick S, IP: [64.161.177.74]

L2: Vanguard and 1099,sSorry, but I think you are missing the point. The Trustee/Custodian is NOT obligated to use a code of ””2”” because someone says their plan is a SEPP. Unless they know the plan is valid in all respects, they should use a code of ””1””. That””s exactly why the IRS has the form that you can use to claim the exemption.
Additionally, regardless of how the1009 is coded, it is still between you and the IRS. If the IRS presents a challenge, you can””t count on a code of ””2”” solve the problem – it will be up to you to meet the challenge and provide the appropriate documentation.
I also agree with the other poster that stated many Trustee/Custodians will probably only use a code of ””1”” in the future.
As per my previous post, the parameters that I use to issue a code of ””2”” are …

We hold all assets for the entire year; and,
We agree with the assumptions like interest, etc; and,
The annualized payment stays level, or if recalculation occurs, then all variables including interest, age and balance are recalculated annually.
From the update that you quote… A distribution that is a part of a series of substantially equal periodic payments as described in section 72(q), (t), and (v). This part requires agreement that the plan is qualified under the sections indicated – something that most don”t know and don”t care to know.
2004-12-07 20:11, By: Gfw, IP: [172.16.1.70]