“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)

“Your Complete Retirement Planning Road Map:
A Comprehensive Action Plan for Securing IRAs, 401(k)s,
and Other Retirement Plans for Yourself and Your Family

A few of the more important considerations to keep in mind when choosing the right vehicle for your IRA contributions include:

• Tax Treatment (both at time of contribution and distribution)
• Income Limitations
• Age Limitations
• Required Minimum Distributions
• Early Withdrawal Penalties
• Contributions after 70 1/2
• Beneficiary Tax Consequences

IRA Comparison Chart

This handy comparison chart should help you answer questions you didn’t think to ask and help end some of the confusion. 

Open and print your personal copy of the IRA Comparison Chart here.

Copyright 2008 Forefield Advisors

Keep in mind that as long as you have earned income, anyone can contribute to a Traditional IRA. But …

Just Because You Can, Doesn’t Mean You Should

Just because you are permitted to contribute to a Traditional IRA doesn’t mean your annual contribution is deductible. This depends on your income, filing status, and if you or your spouse are covered by a company retirement plan. If you won’t receive an income tax deduction for your contribution, why not consider a ROTH?

ROTH IRA Guidelines

The ROTH IRA places more restrictions on who is allowed to contribute.  In order to take advantage of  tax-free growth found within the ROTH, you must meet certain income and tax filing guidelines.

If you are single / head of household and your income falls within the range of $101,000 – $116,000 congratulations. You can make a ROTH IRA contribution in 2008.  If you are married, file a joint tax return, and together your income falls within the range of $159,000 – $169,000,  you also can contribute. What if you are married, but file separately? Your income must be below $10,000, a very unlikely circumstance.

Bottom Line?

Assuming you meet the ROTH guidelines and you will not receive a tax deduction for the Traditional IRA contribution, the ROTH IRA may be your best choice.

Other Considerations?

Conventional wisdom tells you to diversify your investments among asset classes.  I agree, but believe diversification should be carried one step further.

Diversify your investments by also considering the tax consequences you will face in retirement.  No one knows what the future tax code will be. Your 401k, 403b, pension, Traditional IRA and perhaps even Social Security benefits are taxable. It is wise planning to take advantage of the tax-free growth of the ROTH IRA if you qualify.

If you found this information to be helpful, please share with others using the “share this” button below. You can email to friends, add to social networks or to your blog.

Please remember!  Information is not knowledge and knowledge is not wisdom. Feel free to post questions or comments.  Consult with a professional before making your decision.