sepp
Our client has started an sepp distribution this month using annual distributions. I have received different opinions as to whether the annual distributions need to be taken in the same month every year on can be changed to any month as long as the annual amount is taken out.
Do you have an opinion?
Permalink Submitted by Alan Spross on Wed, 2008-09-03 23:51
The annual amount can be distributed over any schedule the client wishes as long as the correct annual amount is taken and shows on the 1099R. Moreover, the schedule can also change from year to year.
What you might be hearing is related to whether various IRA custodians would be willing to code the 1099R with the penalty exception code. Many will not, but some will if the client adheres to a rigid schedule. These schedules are the requirement of the IRA custodian only, not the IRS. If the custodian codes the distributions as early, then the client can attach Form 5329 to his return and claim the SEPP exception. Many SEPP participants have to do this every year because their custodians (including Vanguard) will not code the 1099R to recognize the SEPP. Since so many participants must attach the 5329, it no longer presents any kind of red flag to the IRS.
Taking out the full annual amount early in the year forces the client into a rather strict budget routine because if they do not save for contingencies including taxes, they will bust their plan. However, the flexibility is there if needed.