72(t) Not Allowed After 1035 Exchanges

[Drifting]

I just did a 1035 exchange (in 2 parts) from Sun America to Vanguard. Vanguard initially told me that they would be able to restart my 72(t) program after the transfer. Well a week later they tell me that their compliance department says that they can't do it! They said that they can't code it as a "2" on the tax form. "Fortunately" I will only have to pay taxes on 3 prior systemic withdrawals from Sun America from the past 3 years.
My question is could this be a "Vanguard problem"? Why would they not be able to restart a 72(t) systemic withdrawal at all? Is it likely that if I switch to another low cost company that THEY might be able to restart the 72(t) program?

I have a 30 day "free look" period with Vanguard. I actually did a partial 1035 exchange for half of my Sun America annuity, then did the other half as a full 1035 exchange a couple of weeks later. If I sent the 2nd half back to Sun America would they likely be able to recontinue the 72(t) for that half? Or is it all or nothing?

 

[Tahoe Ray]

I'm not a CPA but you should definitely talk to one immediately on this issue.

What kind of account is this? There is some conflicting terminology here (which isn't surprising since some of these terms are used interchangeably). A 1035 is for non-qualified annuities. A 72(t) is for qualified accounts (which could hold an annuity). A 72(q) is for non-qualified SEPPs. So was this an IRA annuity transfer or a 1035 exchange?

I'm not trying to nitpick, just that if this is a qualified account, you'll be able to look at a lot more options than just annuity carriers.

Normally, doing any type of exchange/transfer is not recommended while taking SEPP payments. The IRS has both a revenue ruling and a private letter ruling dealing with this issue and neither fall in your favor.

The waters are still murky though. As to my knowledge, there has been no definitive ruling as to why there should be a penalty for doing this.

You might be able to find a carrier/custodian to allow this transfer/exchange but it might be tough due to what I outlined above.

As I mentioned before, speak to a good accountant for direction here. It will save you a lot of headaches (and 10% early w/d penalties) in the future.

Good luck.

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CORRECTION: Now Sun America is telling me that my systemic withdrawals were set up as a "1" in tax code and that a 72(t) was never set up. So if that's the case then I'm probably OK with staying with Vanguard. I can still get these annual systemic payments.

Getting the payments isn't the problem. Whether you'll be penalized 10% for not following 72t/q guidelines is going to be the issue...

 

[Drifting]

Sun America just called me back. It was indeed a 72(t). This was a non-qualified variable annuity. Was it a Q or a T? I don't know. The representatives I speak to often give me conflicting information.

I have asked Sun America if I can move 1/2 of this annuity BACK in order to reinstate 1/2 of the 72(t). They will get back to me next week. Not sure if a reinstatement will be allowed or not. It's all a convoluted mess trying to understand tax code.

Getting the payments isn't the problem. Whether you'll be penalized 10% for not following 72t/q guidelines is going to be the issue...

I hope you're right and I can stay with Vanguard (they are vastly cheaper). I wouldn't mind just paying the 10% + state penalties on prior withdrawals with Sun America if I could get back on a withdrawal program with Vanguard. I only took out systemic withdrawals from Sun America for 3 years.

 

[Tahoe Ray]

Sun America just called me back. It was indeed a 72(t). This was a non-qualified variable annuity. Was it a Q or a T? I don't know. The representatives I speak to often give me conflicting information.

I have asked Sun America if I can move 1/2 of this annuity BACK in order to reinstate 1/2 of the 72(t). They will get back to me next week. Not sure if a reinstatement will be allowed or not. It's all a convoluted mess trying to understand tax code.

I hope you're right and I can stay with Vanguard (they are vastly cheaper). I wouldn't mind just paying the 10% + state penalties on prior withdrawals with Sun America if I could get back on a withdrawal program with Vanguard. I only took out systemic withdrawals from Sun America for 3 years.

I hope this works out for you but I would stop listening to the customer service people and talk to an accountant about what you can start/undo/continue etc.

After all, you'll be the one paying the penalties, not the carriers.

 

[Norwayguy]

Sun America just called me back. It was indeed a 72(t). This was a non-qualified variable annuity. Was it a Q or a T? I don't know. The representatives I speak to often give me conflicting information.

I have asked Sun America if I can move 1/2 of this annuity BACK in order to reinstate 1/2 of the 72(t). They will get back to me next week. Not sure if a reinstatement will be allowed or not. It's all a convoluted mess trying to understand tax code.

I hope you're right and I can stay with Vanguard (they are vastly cheaper). I wouldn't mind just paying the 10% + state penalties on prior withdrawals with Sun America if I could get back on a withdrawal program with Vanguard. I only took out systemic withdrawals from Sun America for 3 years.

72q for nonqualified annuity SEPP.

 

[Drifting]

I hope this works out for you but I would stop listening to the customer service people and talk to an accountant about what you can start/undo/continue etc.

After all, you'll be the one paying the penalties, not the carriers.

Not a total disaster if I wind up having to pay for the 3 years of withdrawals. But does it sound right that I would not be allowed to start up a NEW 72(t) or 72(q) or whatever it is? I really hope that Vanguard is wrong about that.

 

[scagnt83]

Not a total disaster if I wind up having to pay for the 3 years of withdrawals. But does it sound right that I would not be allowed to start up a NEW 72(t) or 72(q) or whatever it is? I really hope that Vanguard is wrong about that.

Ray is right. Stop speaking to mindless customer service reps and go talk to a CPA. Or get yourself a financial advisor. Customer Service reps are notorious for their incompetency, especially on complex tax issues.

 

[Drifting]

Ray is right. Stop speaking to mindless customer service reps and go talk to a CPA. Or get yourself a financial advisor. Customer Service reps are notorious for their incompetency, especially on complex tax issues.

Notorious is right. I have stories to tell about both Sun America AND Vanguard giving me erroneous information.

BTW this was Vanguard's "compliance department" that produced the bad news. I am hoping that the rep I spoke to was saying that they could not CONTINUE my EXISTING 72(q). I called later in the day today and spoke to another rep and he said that "due to liability reasons" Vanguard does not handle 72(q) setups and that I could set up a systemic withdrawal on my own through my own CPA. So who knows! It's the weekend. I was just hoping to get some optimistic initial opinions on this. I'm hoping that at the very least I can restart a systemic withdrawal.

 

[DHK]

I was always told that if there's an existing 72(t) or (q) distribution going on... DON'T TOUCH IT! I guess this is just one example of what can happen if you do interrupt it.

 

[scagnt83]

Notorious is right. I have stories to tell about both Sun America AND Vanguard giving me erroneous information.

BTW this was Vanguard's "compliance department" that produced the bad news. I am hoping that the rep I spoke to was saying that they could not CONTINUE my EXISTING 72(q). I called later in the day today and spoke to another rep and he said that "due to liability reasons" Vanguard does not handle 72(q) setups and that I could set up a systemic withdrawal on my own through my own CPA. So who knows! It's the weekend. I was just hoping to get some optimistic initial opinions on this. I'm hoping that at the very least I can restart a systemic withdrawal.

Yeah that is about par for the course unfortunately. There is another consumer on the board posting in the life insurance section who is dealing with customer service for a complex transfer. Unfortunately it is clear there is confusion going on. Those guys arent real agents, their knowledge level is not the same as an agent. And it is way too easy for them to talk out of their a@#.

Personally, I would raise holly hell with Vanguard and tell them it was their mistake, they pay the taxes/penalties/whatever. Ask to speak to the head of that compliance department, tell them what you were told by customer service, and now what position your in, and that you are considering legal counsel if they cannot make this situation right.
It might help, it might not.

Again, I would suggest working with an advisor. I do not do Variable Annuities, but I can most likely recommend someone who could help. Although, at this point, there might not be much left to do since the transfer has already occurred. At this point your best bet probably is a CPA. They can evaluate your situation, then call the company on your behalf and get things right.