Vanguard insists coding ALL early dist”s as 02

L1: Vanguard insists coding ALL early dist”s as 02Hi again;
Using your very helpful link to the Aug 09 2004 IRS notice on Distribution Code changes, it is very clear that the IRS says OK for custodians to code SEPP””s as 02, and other exceptions (first time house, medical, etc.) as 01. In fact, the notice instructs them to do so, and even suggests they file an amended 1099R if one was issued that is wrong per the notice.
Unfortunately, after multiple calls and e-mails to my custodian, Vanguard, I find that their policy now is to code ALL early distributions, even simple SEPP””s, as code 01. When discussing the Aug 09 notice, their reply is that their legal dept. has decided, “since the IRS keeps going back and forth on the code 01 vs 02 matter”, they are just coding them all as 01, and let the taxpayer file the 5329.
I can see that the form 5329 is pretty simple, but I””d rather not be filing as an ””exception”” every year (also, my tax preparer, as expected, charges more for more forms).
Vanguard is a big and respected house; I didn””t expect this from them.
Have you heard of them doing this?
Are the other big houses such as Fidelity doing this?
Has the IRS been going back and forth that much?
I do see that the instructions for 5329 are currently not available online, pulled from their site for ””error corrections””… another change?
Thanks,
Rick S.
2004-12-04 16:14, By: Rick S, IP: [67.122.12.74]

L2: Vanguard insists on coding ALL early dist””sHello Rick:
Yes, the IRS has gone back and forth on this issue throughout 2004 but was, in my opinion, cleared up this last August and again in a press release last week. Nonetheless, when the final 1099R instructions come out in a couple of weeks, its would not surprise me to see the IRS bungle it up; it’s happened before.
With this background, I am not surprised that a trustee/custodian would “throw their hands up in the air” and take a self-protective approach such as Vanguard seems to have done.
I think a factual & stern letter to Vanguard’s General Counsel might be in order focusing on “customer service” and “customer friendliness” versus covering their own posterior & how this latest issue (with Vanguard), although administrative in nature is probably just enough to push you over the edge and move all your assets to Fidelity, Schwab, etc.
I have used this tactic in the past (with Fidelity in my case on a totally unrelated issue) when I told them; “Fix this issue, at least for me, right now; OR, every dime invested with you will be moved by month’s end”. Again compared to the assets under mangement, it was a trivial issue but I was upset & ranting. Much to my surprise, i got a call back & they fixed it.
TheBadger
wjstecker@wispertel.net
2004-12-04 16:29, By: TheBadger, IP: [66.250.23.22]

L2: Vanguard insists on coding ALL early dist””sThe Trustee/Custodian does have several outs to coding the 1099 with a code of 2′ – remember when using a code of ‘2’, they are in effect saying that the distribution is exempt from the 10% penalty – that can only be true if the SEPP plan is a valid SEPP plan.
We will use a code of 2′ if each of the following conditions is met when the SEPP is first initiated with us and for each subsequent year that we hold the assets.

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.Just my thoughts.
2004-12-04 16:45, By: Gfw, IP: [172.16.1.71]

L2: Vanguard insists on coding ALL early dist””sI have the same problem with Vanguard and received an IRS request for payment. They claimed they had no way of verifying a legit.SEPP. We filed a 5329 and that was it.I seriously doubt Vanguard will change it’s mind.2004-12-05 07:33, By: bob, IP: [67.76.12.44]

L2: Vanguard insists coding ALL early dist””s asBob,
Thanks for your input. Vanguard finally wrote back to me, verifying that they’re aware of the recent instructions to use code 2, but they’regoing to ignore them anyway.
(I’ve included their answer to me at the end of this post, for laughs).
I called Fidelity today and discussed their dist. code policies. They recognize and code SEPP’s as code 02, and the rest of the exceptions as 01, like they’re supposed to!
Ironically, my 401K grew for all its years in Fidelity, and when I quit working, I rolled it over to Vanguard IRA because they are very low cost on their mutual fund expense ratios.
Now, I discover that Fidelity has a new president, Jeff Carney (for about a year now) and he has driven their expense ratios down to seriously compete with Vanguard. For example, their S&P type index fund (spartan fund, FSMKX) has a cost of 0.1% (down from 0.4%) now, as compared to 0.25% for Vanguard’s equivalent fund (VTSMX).
I am now considering changing custodians before I initiate my SEPP.
Rick
PS here’s the answer from Vanguard re: my question on dist. codes:
Dear Mr. Schilf:
Thank you for your e-mail regarding the new IRA Distribution codes.
Vanguard has been following the latest IRA Distribution regulations veryclosely and is aware of the notice you brought to our attention.
We do understand that SEPP distributions are different than the otherpremature distributions. However, it is Vanguard’s opinion that thedifferent codes should only be used if we has factual information that ashareholder is eligible for this exception. Since Vanguard does not offerSEPP service to our shareholders, we do not have factual information thatone is taking the proper amount and has not modified their payments.Therefore, we can no longer allow any of our shareholders to “self-certify”(inform us that he/she meets an exception) an exception due to SEPP ordisability.
When you complete your tax return, there will be specific instructions onIRS Form 5329 on how to designate your SEPP distribution.
If you have any questions, please feel free to contact Vanguard VoyagerService by calling 1-800-284-7245. Voyager Registered Representatives areavailable Monday through Friday from 8 a.m. to 10 p.m. Eastern time and onSaturday from 9 a.m. to 4 p.m. Eastern time.
Sincerely,
Brian CrumpRegistered RepresentativeVanguard Voyager Service
2004-12-07 00:10, By: Rick S, IP: [67.122.12.74]