72(t) Not Allowed After 1035 Exchanges

[Drifting]

Drifting,
So long story short. What you did was take an exemption under 72(q)(2)(D).

And do you think I should be able to start up a new systemic withdrawal program (after stopping this one)? I had one rep at Vanguard telling me no and another saying yes, although he said that I'd have to hire my own CPA to do it. That sounded bizarre that they wouldn't do it, but he said that it was for liability reasons that Vanguard doesn't set up systemic withdrawal programs.

And (with most annuities) if I can start up a new systemic withdrawal program, can I continue ONLY until age 59 1/2, then stop without paying the 10% IRS penalty (plus CA state penalty)? My intention is to get out of the annuity completely in short order upon turning age 59 1/2 when there's no more 10% penalty (plus state penalty). I guess what I'm asking is whether a systemic withdrawal is for life or until age 59 1/2 (or at least 5 years, whichever is greater)?

I understand that you're just guessing here but the more opinions that line up the same, the better. I will begin to trust when I hear the same thing from Vanguard reps and my own accountant.

 

[sman]

And do you think I should be able to start up a new systemic withdrawal program (after stopping this one)? I had one rep at Vanguard telling me no and another saying yes, although he said that I'd have to hire my own CPA to do it. That sounded bizarre that they wouldn't do it, but he said that it was for liability reasons that Vanguard doesn't set up systemic withdrawal programs. And (with most annuities) if I can start up a new systemic withdrawal program, can I continue ONLY until age 59 1/2, then stop without paying the 10% IRS penalty (plus CA state penalty)? My intention is to get out of the annuity completely in short order upon turning age 59 1/2 when there's no more 10% penalty (plus state penalty). I guess what I'm asking is whether a systemic withdrawal is for life or until age 59 1/2 (or at least 5 years, whichever is greater)? I understand that you're just guessing here but the more opinions that line up the same, the better. I will begin to trust when I hear the same thing from Vanguard reps and my own accountant.

Not intending to sound like a jerk, but why didn't you ask these questions BEFORE deciding to transfer your money? The new low cost annuity isn't going to be as cheap as you first thought.

 

[Drifting]

Not intending to sound like a jerk, but why didn't you ask these questions BEFORE deciding to transfer your money? The new low cost annuity isn't going to be as cheap as you first thought.

I did ask what I thought were the pertinent questions! The problem is that annuities are so complicated that just when you think you know what you need to know, you don't.

Back taxes will be made up for in less than a year. See earlier post. Isn't going to be AS cheap, but it's still a no brainer to switch from 3.14% in annual fees to 0.58% annual fees.

 

[sman]

I did ask what I thought were the pertinent questions! The problem is that annuities are so complicated that just when you think you know what you need to know, you don't. Back taxes will be made up for in less than a year. See earlier post. Isn't going to be AS cheap, but it's still a no brainer to switch from 3.14% in annual fees to 0.58% annual fees.

Evidently you didn't ask the right people.

 

[Drifting]

Evidently you didn't ask the right people.

That's an understatement! I was working with an adviser who gained my trust and egregiously broke all kinds of securities laws (churning, putting way more than 50% of my liquid savings into illiquid investments, selling off all of my stocks to invest in this annuity, etc). I never understood what happened until after the statute of limitations. The SEC was powerless to do anything by the time I finally reported this person.

Many thanks to scagnt83 especially for shedding lots of light on these issues.

 

[scagnt83]

And do you think I should be able to start up a new systemic withdrawal program (after stopping this one)? I had one rep at Vanguard telling me no and another saying yes, although he said that I'd have to hire my own CPA to do it. That sounded bizarre that they wouldn't do it, but he said that it was for liability reasons that Vanguard doesn't set up systemic withdrawal programs.
.

I am not aware of any regs that would not allow you to.

It is not surprising that Vanguard will not administer the 72(q)(2)(d).
As you have found out, there are lots of ins and outs to it that are easy to mess up.
If you take out $1 more or $1 less per year than the required amount then it voids the exemption.

There are actually 3 different calculations that you can choose from to calculate how much to take per year. These are not simple calculations.

Also, Vanguard is not an annuity company. The annuity you bought is actually issued and financially backed by Monumental Life. Vanguard just has an agreement with them to act as middle man and put their own "wrapper" on it so to speak.

My point, is that Vanguard does not have the in-house annuity resources/experience that a life insurance company who issues annuities does. So with less experience and knowledge comes increased liability for them. And as your situation illustrates, these things are easy to screw up if some random customer service rep starts talking out their back end without checking with compliance dept.

Many true annuity companies will administer it because they have the experience/knowledge/resources to do so. Vanguard is basically just a glorified agent/agency in this situation.

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And (with most annuities) if I can start up a new systemic withdrawal program, can I continue ONLY until age 59 1/2, then stop without paying the 10% IRS penalty (plus CA state penalty)? My intention is to get out of the annuity completely in short order upon turning age 59 1/2 when there's no more 10% penalty (plus state penalty). I guess what I'm asking is whether a systemic withdrawal is for life or until age 59 1/2 (or at least 5 years, whichever is greater)?

If you can, then the SEPPs must be a minimum of 5 years. You can choose the time span, but it must be at least 5 years long and until age 59.5.

If you start the 5 year SEPPs you HAVE to finish all 5 years no matter what, no matter your age.
So if you start at age 58, you must continue them until age 63.



My biggest question here is: Why did you start the 72(Q) SEPPs in the first place???
Just to get a little bit of money out of the contract to move??

It doesnt really make sense in my opinion if you dont need the income.

From what you have stated, it sounds like you should have just done a 1035 exchange to Vanguard in the first place, and just not worry about SEPPs.
Then wait until 59.5, and move the funds to wherever you want.

What is the account value? The SEPPs couldnt have been all that much based on your age/life expectancy....

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I did ask what I thought were the pertinent questions! The problem is that annuities are so complicated that just when you think you know what you need to know, you don't.
.

Not to beat a dead horse, but this is why doing it yourself on investments can be dangerous. Out of curiosity, did you consult with Sun America before doing the exchange? Did you ask them if it would void the exemption?

Since they were the ones who set up and administered the SEPPs, they are the ones who you really should have been talking to about the viability of the exchange.

I still think you should raise hell with Vanguard since they led you to believe the SEPPs could be continued after the exchange. Tell them you dont want to free look the policy and move funds to a competitor, but you feel they should provide restitution for their mistake... it cant hurt to try.


You mentioned an "income tax bomb" in the other thread... well the biggest tax bombs in this industry usually stem from mistakes caused by ignorance.
Im not calling you ignorant in a general sense or in a bad way, you actually seem very intelligent. But anyone who is not an agent is largely ignorant on the subject of annuities.

Annuities are not that complicated really. They have a few more tax regs surrounding them that are often not as well known by the general public. But the product itself is not all that complicated if explained correctly.
Taxes are always complicated, no matter what. Even equities have long term capitol gains. short term capitol gains, taxes on dividends, state taxes, etc. And when to apply what varies upon the situation.

Often the professional guidance is for the tax guidance as much as it is for the investment guidance.

 

[Drifting]

My biggest question here is: Why did you start the 72(Q) SEPPs in the first place???
Just to get a little bit of money out of the contract to move??

I needed some of the money and can EASILY do better in ETF's than Sun America. Of course when I started the SEPP I thought that Sun America was about as low cost as there is out there. Come to find out that Vanguard is probably gonna save me at least 2% per year, and probably more when factoring in the fact that passively manged funds on the whole beat actively managed by about 0.8% per year on average. The Sun America annuity I was in has no passively managed funds. Again, the 3 years of back taxes will be paid for in about 8 - 12 months. It's still EASILY worth it to me to transfer. I still wish I had known about Vanguard 10 years ago.

Out of curiosity, did you consult with Sun America before doing the exchange? Did you ask them if it would void the exemption?

Not the 72(q) specifically because Vanguard said it would transfer.

I still think you should raise hell with Vanguard since they led you to believe the SEPPs could be continued after the exchange. Tell them you dont want to free look the policy and move funds to a competitor, but you feel they should provide restitution for their mistake... it cant hurt to try.

If sending it all back to Sun America would unwind the election to end the SEPP (and restart it) then I am guessing that Vanguard would just say "No problem. You can go back to Sun America." Then I'm back to paying ridiculously high fees. But if that wouldn't unwind it then I see what you're saying. Can't hurt to ask.

 

[scagnt83]

If sending it all back to Sun America would unwind the election to end the SEPP (and restart it) then I am guessing that Vanguard would just say "No problem. You can go back to Sun America." Then I'm back to paying ridiculously high fees. But if that wouldn't unwind it then I see what you're saying. Can't hurt to ask.

Im not sure if it would reinstate the exemption or not.
Either way it seems that you are better off with the current Vanguard VA.

What I meant was that sometimes when a company gives bad advice that results in a client getting fined, they will make restitution. This is rare without lawyers involved, but sometimes it happens without.

But it seems that you would have exchanged it either way, so I say pay the 10% and just move forward.

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Not the 72(q) specifically because Vanguard said it would transfer.

Unfortunately that is where you went wrong.

Since Sun America was the one who set it up and was administering the distributions, they were the ones you needed to talk to. Most likely they would have informed you that it would void the exemption.

 

[Drifting]

What I meant was that sometimes when a company gives bad advice that results in a client getting fined, they will make restitution. This is rare without lawyers involved, but sometimes it happens without.

Yeah. I'll put it out there and see what happens, but I won't press them or be going down the lawyer route. In the beginning I already made an off comment to the rep at Vanguard that it was still worth it to me if the SEPP program wouldn't continue. They would use that against me I would imagine.

Since Sun America was the one who set it up and was administering the distributions, they were the ones you needed to talk to. Most likely they would have informed you that it would void the exemption.

You might like this story:
I've actually butted heads with Sun America before and actually got them to reimburse me for their failure to process a withdrawal request on the day they should have processed it (and while the market was high). At first they denied my request, saying that I didn't fill out their form "in good order". But after I dug down to citing legal language in their prospectus and threatened to sue, they caved it. I demanded the closing price be honored on the day they received the form in good order (the market went down a day later). They were basically trying to rewrite the rules on the fly. They said that I needed to provide supplementary documentation when requesting a check to be mailed to an alternate address (my ETrade account). It may have been their rule but on their form there was NO such mention of this rule, and their prospectus said that withdrawals are priced on the day the form is received in good order. So whoever crafted their form didn't word it correctly, and I guess with Sun America they prefer to abide by the rules only when they work in their favor.

 

[scagnt83]

Yeah. I'll put it out there and see what happens, but I won't press them or be going down the lawyer route. In the beginning I already made an off comment to the rep at Vanguard that it was still worth it to me if the SEPP program wouldn't continue. They would use that against me I would imagine.

Yeah, at this point there is probably no point. From a moral perspective, if you would have made the exchange anyway, then the right thing to do would be to just pay the penalty.

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You might like this story:
I've actually butted heads with Sun America before and actually got them to reimburse me for their failure to process a withdrawal request on the day they should have processed it (and while the market was high). At first they denied my request, saying that I didn't fill out their form "in good order". But after I dug down to citing legal language in their prospectus and threatened to sue, they caved it. I demanded the closing price be honored on the day they received the form in good order (the market went down a day later). They were basically trying to rewrite the rules on the fly. They said that I needed to provide supplementary documentation when requesting a check to be mailed to an alternate address (my ETrade account). It may have been their rule but on their form there was NO such mention of this rule, and their prospectus said that withdrawals are priced on the day the form is received in good order. So whoever crafted their form didn't word it correctly, and I guess with Sun America they prefer to abide by the rules only when they work in their favor.

Unfortunately when you send in a form like that you are not just dealing with a company, but you are also dealing with a single individual.

Obviously I dont the details of the situation. But I would not be surprised at all if another person in that department had received the form and sent it through. I have had stuff like that happen before.

Just like you had one Vanguard rep say you could reinstate the SEPPs and another said you couldnt.... when dealing with customer service reps, WHICH service rep you are dealing with can make a HUGE difference.

That again is another reason to work with a trusted agent. While we might get pushback on issues, it is not nearly as much pushback as a client gets. It also takes the hassle off of you and puts it in the hands of a professional.

We also often deal with different departments when processing paperwork. Not that the internal service reps are the best and brightest, but they are a whole lot better than "external" Customer Service Reps that clients deal with when they call.

Also, an agent just has more leverage. If a company pisses an agent off it could mean the loss of many future accounts. If they piss a client off, its just one account. Agents also have uplines and B/Ds (back rooms) that can help to fix issues. And they have even more leverage than an agent, since they will have multiple agents contracted through them.