Annuity, SEPP withdrawal, taxation

[Mighty-Dollar]

I get SEPP (substantially equal periodic payments) income from a non-qualified variable annuity with Vanguard. In Box 7 they have a 2 for "Early distribution (except Roth) exception applies". I'm less than age 59 1/2. Each year on the 1099 they withhold 10% for Federal income tax. Is that 10% kind of like paying estimated taxes for the tax year? For example my actual taxes might be higher or lower, then I owe more or am owed a refund?

I use Turbo Tax. What got me questioning things is that this year after entering my 1099 info regarding this annuity, for THE FIRST TIME EVER, TurboTax then asks "These situations may lower your tax bill" and one of the choices is "Equal periodic payments". Was there a change in tax laws this year, whereby you get a DEDUCTION if you're taking SEPP withdrawals?

[secondcor521]

I get SEPP (substantially equal periodic payments) income from a non-qualified variable annuity with Vanguard. In Box 7 they have a 2 for "Early distribution (except Roth) exception applies". I'm less than age 59 1/2. Each year on the 1099 they withhold 10% for Federal income tax. [1] Is that 10% kind of like paying estimated taxes for the tax year? [2] For example my actual taxes might be higher or lower, then I owe more or am owed a refund?

I use Turbo Tax. What got me questioning things is that this year after entering my 1099 info regarding this annuity, for THE FIRST TIME EVER, TurboTax then asks "These situations may lower your tax bill" and one of the choices is "Equal periodic payments". [3] Was there a change in tax laws this year, whereby you get a DEDUCTION if you're taking SEPP withdrawals?

[Numbers added]

1.  Kind of, yes.  There are some differences but you probably aren't interested in those at the moment.
2.  It is treated as a payment, so it increases your refund or reduces the amount owed relative to what would have happened had they not withheld the payment.  It works just like withholding from your paycheck, if that helps.
3.  No.  It's likely referring to the fact that by doing SEPPs you avoid the 10% penalty for pre-59.5 withdrawals.  Avoiding the penalty could be said to be lowering your tax bill.

[Mighty-Dollar]

[3] Was there a change in tax laws this year, whereby you get a DEDUCTION if you're taking SEPP withdrawals?

3.  No.  It's likely referring to the fact that by doing SEPPs you avoid the 10% penalty for pre-59.5 withdrawals.  Avoiding the penalty could be said to be lowering your tax bill.

It just seems strange that TurboTax suddenly just added this extra section this year. Seems to me that the numbers I enter from the 1099 would be all that are needed. This new section says "These situations may lower your tax bill. If you used the money you took out of an annuity for any of the following reasons, you may not have to pay the additional tax. Enter the amounts that you used for any of the following: Equal periodic payment, permanent disability, death, IRS levy, other reason".

[terran]

[3] Was there a change in tax laws this year, whereby you get a DEDUCTION if you're taking SEPP withdrawals?

3.  No.  It's likely referring to the fact that by doing SEPPs you avoid the 10% penalty for pre-59.5 withdrawals.  Avoiding the penalty could be said to be lowering your tax bill.

It just seems strange that TurboTax suddenly just added this extra section this year. Seems to me that the numbers I enter from the 1099 would be all that are needed. This new section says "These situations may lower your tax bill. If you used the money you took out of an annuity for any of the following reasons, you may not have to pay the additional tax. Enter the amounts that you used for any of the following: Equal periodic payment, permanent disability, death, IRS levy, other reason".

Sounds like they're looking for exceptions to the early withdrawal penalty. Since you're taking SEPP withdrawals you aren't subject to the penalty. Make sure Turbotax is doing that correctly though.

[secondcor521]

[3] Was there a change in tax laws this year, whereby you get a DEDUCTION if you're taking SEPP withdrawals?

3.  No.  It's likely referring to the fact that by doing SEPPs you avoid the 10% penalty for pre-59.5 withdrawals.  Avoiding the penalty could be said to be lowering your tax bill.

It just seems strange that TurboTax suddenly just added this extra section this year. Seems to me that the numbers I enter from the 1099 would be all that are needed. This new section says "These situations may lower your tax bill. If you used the money you took out of an annuity for any of the following reasons, you may not have to pay the additional tax. Enter the amounts that you used for any of the following: Equal periodic payment, permanent disability, death, IRS levy, other reason".

TurboTax is a constantly evolving product, as I think all of the tax prep programs are.  It's not a static thing.

Also, agree with what @terran wrote above.

[seattlecyclone]

[3] Was there a change in tax laws this year, whereby you get a DEDUCTION if you're taking SEPP withdrawals?

3.  No.  It's likely referring to the fact that by doing SEPPs you avoid the 10% penalty for pre-59.5 withdrawals.  Avoiding the penalty could be said to be lowering your tax bill.

It just seems strange that TurboTax suddenly just added this extra section this year. Seems to me that the numbers I enter from the 1099 would be all that are needed. This new section says "These situations may lower your tax bill. If you used the money you took out of an annuity for any of the following reasons, you may not have to pay the additional tax. Enter the amounts that you used for any of the following: Equal periodic payment, permanent disability, death, IRS levy, other reason".

If you've been using TurboTax all this time and have been doing SEPP withdrawals for several years, but you don't remember being asked about whether they were SEPP withdrawals before, you may want to look at your previous tax returns to make sure that the early withdrawal tax was not paid. This would show up on Part I of Form 5329. You may find it worthwhile to amend your previous tax returns if this tax was added in the past.

[Mighty-Dollar]

If you've been using TurboTax all this time and have been doing SEPP withdrawals for several years, but you don't remember being asked about whether they were SEPP withdrawals before, you may want to look at your previous tax returns to make sure that the early withdrawal tax was not paid. This would show up on Part I of Form 5329. You may find it worthwhile to amend your previous tax returns if this tax was added in the past.

Wow. I checked my 2017 return. Part I of Form 5329 is blank. I'm guessing that the "Distributions not subject to additional tax smart worksheet" should list the distribution amount next to "Equal periodic payments"?
What are non-simple versus simple distributions?
I noticed that in TurboTax it says "Based on your entry [code 2 D] for box 7 on your 1099-R, you don't need to pay any extra taxes on the money taken out of this account."
Maybe the 10% that was withheld by Vanguard was for the pre-age 59 1/2 10% penalty, and not for like an estimated tax prepayment.
If I overpaid on taxes then I'm guessing that the IRS only lets me look back 3 years for refunds.

On my 1099 why wouldn't the IRA/SEP/SIMPLE box be checked?

[secondcor521]

If you've been using TurboTax all this time and have been doing SEPP withdrawals for several years, but you don't remember being asked about whether they were SEPP withdrawals before, you may want to look at your previous tax returns to make sure that the early withdrawal tax was not paid. This would show up on Part I of Form 5329. You may find it worthwhile to amend your previous tax returns if this tax was added in the past.

Wow. I checked my 2017 return. Part I of Form 5329 is blank. I'm guessing that the "Distributions not subject to additional tax smart worksheet" should list the distribution amount next to "Equal periodic payments"?
What are non-simple versus simple distributions?
I noticed that in TurboTax it says "Based on your entry [code 2 D] for box 7 on your 1099-R, you don't need to pay any extra taxes on the money taken out of this account."
Maybe the 10% that was withheld by Vanguard was for the pre-age 59 1/2 10% penalty, and not for like an estimated tax prepayment.
If I overpaid on taxes then I'm guessing that the IRS only lets me look back 3 years for refunds.

On my 1099 why wouldn't the IRA/SEP/SIMPLE box be checked?

If your 2017 Form 5329 Part I is blank, that means that you were not charged the 10% early withdrawal penalty.  If that is true, then you would not need to amend 2017 in order to get the 10% penalty back, because you didn't pay it.  (If you had paid it, you would see it on line 4 of Form 5329.)

What is the context for "simple" vs "non-simple" distributions?  I haven't seen that in any IRS stuff I've read.  Is the word SIMPLE capitalized?  If so, that's a kind of retirement account I believe, and wouldn't apply to you as you apparently don't have a SIMPLE account.

As implied, it would be good to check your 2018 Vanguard 1099-R and your return as well to see what happened there.

...

I dug into it a little more, and the fact that Vanguard is putting a code 2 in box 7 (in addition to the code D) means that they know that it is part of an SEPP.  Because they know that and because they put a code in box 7, that means you're not subject to the 10% penalty.  The tax program knows that because of the code, and doesn't fill out Form 5329 (at least, not Part I, which is the relevant part for this part of your tax situation.)

It is likely that Vanguard has reported your distributions in 2017 and 2018 with code 2 as well.

I'm not sure why Vanguard withholds 10%.  It would likely be estimated taxes if the distribution is considered taxable income.

The reason the IRA/SEP/SIMPLE box is not checked is because what you have is none of those things.

(https://www.irs.gov/pub/irs-pdf/i1099r.pdf)

[Mighty-Dollar]

It is likely that Vanguard has reported your distributions in 2017 and 2018 with code 2 as well.

I'm not sure why Vanguard withholds 10%.  It would likely be estimated taxes if the distribution is considered taxable income.

The reason the IRA/SEP/SIMPLE box is not checked is because what you have is none of those things.

(https://www.irs.gov/pub/irs-pdf/i1099r.pdf)

Vanguard has never wavered in the way that they fill out the 1099-MISC form. Everything is the same every year.
I'm guessing that LIFO (last in, first out) is the reason for the 10% that's withheld. You have to pay ordinary income taxes on gains (money that's not the original principal that was originally put in). There's plenty of gains money (versus original non-taxable principal) in this annuity. Gains have to come out first.
Just for peace of mind, I'm going to have a TurboTax offline review. Even if my prior tax returns check out OK, I'm still perplexed at how in THIS YEAR'S TurboTax they asked me the new questions ("These situations may lower your tax bill...") . And for 2019, under forms, I see that numbers have been entered onto part 1 of form 5329. Again, in prior years, this section was left completely blank.