Do You Have an IRA at Vanguard? Beware!
August 19, 2008 by Lynn, Clarity Coach
Filed under Money and Meaning
Were you one of the 170,000 Vanguard investors who received a letter in July of 2007 explaining that its
“Change in beneficiary policy will help you simplify your planning?”
If you received the letter, did you understand the consequences? If you are like most people, you didn’t.
Ignore Vanguard’s Letter at Your Peril
When Forbes showed Vanguard’s letter to IRA experts, they were outraged. What did the experts have to say?
“It’s crazy. I don’t see how they can change the beneficiaries on your accounts without your consent,” Boston lawyer Natalie Choate said.
“Don’t let your broker or fund company have the final word on how you plan your estate. If your provider won’t follow your instructions, make a change and find one that will. You deserve to keep control of who’ll inherit your assets.” Dan Caplinger, writing for The Motley Fool.
“This borders on the unconscionable,” Green Bay CPA Robert Keebler fumed.
Simplify in this case means that if you hold multiple IRAs at Vanguard, each “class” of IRAs will be bundled together and beneficiary designations will now be the same at each class level.
What Does Vanguard’s Beneficiary Policy Mean to Your IRA?
Let’s say you have three ROTH IRAs, several rollover IRAs, and a Traditional IRA. Each of these types of IRAs now represents a class.
If prior to Vanguard’s policy change, you implemented good estate planning principles, taking advantage of the IRS rules allowing you to designate a different beneficiary for each IRA, that planning has been indiscriminately discarded.
Vanguard views that type of planning unnecessary. Different IRAs for charitable gifting? Separate IRAs for each child? Not necessary in their way of thinking.
Solid estate planning strategies suggest you take advantage of stretch IRA provisions and other tax planning by creating separate IRAs and naming just one beneficiary per IRA. This allows your beneficiaries, Joe, Jane and Jerry, to each inherit one IRA acccount and take distributions based on their individual life expectancy should they inherit your IRA.
So what happens now? According to Vanguard’s new policy, the last beneficiary form received at Vanguard controls the designation of all your IRA classes.
- Your ROTH IRAs now all have the same beneficiary.
- Your Rollover IRAs now have the same beneficiary.
- Your Traditional IRAs have the same beneficiary.
Clarify IRA Class Please?
Example: You separated your ROTH into three equal IRA accounts, filled out account applications for each ROTH naming Joe the beneficary on one account, Jane the beneficiary of the second account, and Jerry the beneficiary on the last account. When Vanguard receives the applications, the one that is processed last is the beneficiary designation that will be placed on all three accounts. Your planning has been thrown out the window. Jerry will now inherit ALL of the ROTH IRAs.
Change your perspective. What if you were the IRA beneficiary?
You were the beneficiary. And now you aren’t.
You are the IRA holder and were physically or mentally incapable of responding to Vanguard’s 2007 letter. Beneficiary changes were done without your consent or knowledge.
Time to Move Your IRA?
If your IRAs are held at Vanguard, or any other firm for that matter, it is vital that you periodically check your current beneficiary designations and make sure the beneficiaries listed reflect your choice. If not, get them changed.
If beneficiaries cannot be changed, move your funds to a firm who respects your power of choice and your ability to implement good estate planning practices.
Resource Articles (open in new window):
Disinherited by Vanguard? Forbes article by Ashlea Ebeling
Recommended IRA Retirement Planning Resource
Excellent IRA Resource and Check lists from Ed Slott: (You will leave this site when clicking on link. Use back arrow to return)
