Approximately one year ago, Vanguard instituted a controversial beneficiary designation policy. Under the new policy, which took effect in September 2007, customers must have identical beneficiary designations for all IRAs of the same type. There is no issue if you have only one IRA at Vanguard. However, if you had multiple IRAs and each IRA had a different beneficiary designated, it is time to re-check your beneficiaries.
Here is an example: let's say you had four contributory IRAs at Vanguard because you wanted to leave one IRA to each of your four children. Previously, you could have designated each child as the sole beneficiary on each of the IRAs. (Among other reasons, you might have wanted to arrange things this way if there was a significant age difference between the four children.) Under the new policy, the only beneficiary recognized by Vanguard would be the individual listed on the last beneficiary designation form that Vanguard processed. In this example, the fourth child might have been the last beneficiary added and that child would receive the proceeds from all four IRAs.
Vanguard says that it sent letters to the 170,000 account holders who would be impacted by this change but some Vanguard investors complain that the communication was not clear enough. Also, if Vanguard did not hear back from account holders, it changed the beneficiary designations for them -- a pretty bold step.
To learn more about this peculiar arrangement, read this article in Forbes. In the meantime, remember that the beneficiary designations must only be the same for each "type" of IRA. The three recognized IRA types are rollover IRAs, contributory IRAs, and Roth IRAs. So you can specify one beneficiary for a contributory IRA and another for your Roth, but you can no longer specify three different beneficiaries for each of your three Roth IRAs. The workaround to this problem is to name all three individuals as beneficiaries on a single Roth IRA or consider moving your accounts away from Vanguard. If you are not certain who your beneficiaries are, it never hurts to double check. This is true no matter where you keep your accounts.
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