SEPP Code 2 question

[jc-caruso]

I’m taking a SEPP (substantially equal periodic payment) withdrawal from my SEP IRA for five years (2023, 2024, 2025, 2026, and 2027) before I turn 59.5. I am my own plan administrator (that is, I don’t have one and am managing all this myself). Vanguard sends me a 1099 for this distribution, but the exception code is “1” (that is, “no exception”). When I fill out my tax information on turbotax, I specify that this is a SEPP withdrawal, get a 5329 form attached specifying this, and pay no penalty. However, the IRS flagged this because the copy of the 1099 that Vanguard sent them has code “1” while turbotax (I think correctly) records the code as “2” (because this IS an exception, and code “2” is used for SEPPs). 

I informed the IRS of this (have not heard anything, probably don’t expect to), but…this will likely come up again for 2024 taxes (and 2025, 2026, and 2027). 

I called Vanguard and after an hour or so on the phone, they basically said that they won’t put a code “2” because that would be somehow taking responsibility for my SEPP. 

Any advice on this? 

Thanks! 

[SusanY1]

Unfortunately, if Vanguard isn't managing the SEPP for your SEP, then they have to report this as code 1 and there isn't really anything that can be done that you're not already doing. 

I would keep the documentation of your substantially equal periodic payments handy and be prepared to send to the IRS each year until you've gotten to the end of this sequence.  I agree that the IRS is not likely to reach out again once you've satisified their initial inquiry, but for each year that your code doesn't match the one on the 1099, you'll  likely get a notice.  

This is because it's an automated system that generates the notice based on the mismatch. 

Then, it takes a human to see the issue and resolve it.  If it weren't automated, the person processing it could likely view your prior year file but IRS systems don't generally "talk" to each other across tax years, so the system won't likely ever see your history, and will continue to ask about this on an annual basis. 

[jc-caruso]

OK, thanks so much for the reply! I can tolerate a yearly request for more info from the IRS.  😉