Fidelity, Schwab, and Vanguard Each Fill In a Different Beneficiary When the Line Is Blank. At One Your Kids Get It, at Another Your Estate Does, and the Difference Is Five Years to Empty It vs. Ten
Two widowed parents leave the same $600,000 IRA to their kids without ever naming a beneficiary. One family gets room to plan, the other gets a probate filing and a tax clock. A single clause in your custodian's fine print…
This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.
Picture two widowed parents. Each leaves a $600,000 traditional IRA to two grown kids, and neither one ever filled out a beneficiary form. One family gets a decade to draw the money down on its own schedule. The other gets five years, a probate filing and a faster tax bill.
The difference comes from a clause most savers never read: the default beneficiary provision in the IRA custodial agreement. Fidelity, Charles Schwab (NYSE:SCHW | SCHW Price Prediction) and Vanguard each write their own. When the beneficiary line is blank, that clause decides who inherits, overriding your will. And whether the clause names a person or your estate decides which payout schedule starts running.
Who Inherits a Blank IRA Depends on Your Custodian’s Fine Print
Every custodial agreement includes a default order for accounts with no beneficiary on file. Usually, the surviving spouse comes first. After that, the agreements split. Some send the account to your children or descendants. Others send it straight to your estate.
The split hits widowed, divorced and single owners hardest, along with couples who die close together. Households aged 55 to 69 hold 49.5% of all defined contribution retirement entitlements, according to the Federal Reserve’s Distributional Financial Accounts for 2026 Q2. Retirement assets also showed up on 5,041 of the 7,195 estate tax returns filed in 2024.
How Section 401(a)(9) Turns Ten Years Into Five
Under the tax code, only a person can be a “designated beneficiary.” The term means “any individual designated as a beneficiary by the employee” (26 U.S.C. § 401(a)(9)(E)(i)). An estate doesn’t qualify.
That one definition resets the schedule. The SECURE Act’s 10-year rule replaces the old five-year rule “except in the case of a beneficiary who is not a designated beneficiary” (§ 401(a)(9)(H)(i)). Adult children named directly get ten years. If the owner dies before required distributions begin, an estate falls back to the original rule: the whole account must come out “within 5 years after the death” (§ 401(a)(9)(B)(ii)).
Your will can leave the estate’s share to your kids. They still face the five-year schedule. Nobody can add a beneficiary after you die, either. IRS Publication 590-B says a beneficiary must be named as of the date of death, and the September 30 deadline the following year only lets existing beneficiaries drop out.
A $600,000 IRA Split Two Ways Shows the Real Cost
Assume a widowed owner dies at 70 in 2026. That’s before her required beginning date (age 73 under current law). She leaves a $600,000 traditional IRA split equally between two adult children. To keep the math clean, ignore investment growth.
| Path | Per-child share | Even annual withdrawal | Deadline |
|---|---|---|---|
| Kids named directly (10-year rule) | $300,000 | $30,000 | End of year 10 |
| Estate face (5-year rule) | $300,000 | $60,000 | End of year 5 |
Now give one child $70,000 of taxable salary income as a single filer. The 22% bracket tops out at $105,700 in 2026.
- Ten-year path: each $30,000 withdrawal stays inside the 22% bracket. That’s $6,600 a year, or $66,000 in total.
- Five-year path: part of each $60,000 withdrawal is taxed at 22% ($7,854). The rest is taxed at 24% ($5,832). That’s $13,686 a year, or $68,430 in total.
The five-year path costs $2,430 more in federal tax per child, before any state income tax. Only the dollars above the line pay 24%. Heirs already in the 32% bracket pay much more for the squeeze.
Beyond the tax math, the estate path gives up five years of tax-deferred growth and goes through probate. It also takes away flexibility. When the owner dies before her required beginning date, a ten-year heir has no distribution required for any year before the 10th year. That heir can wait for a sabbatical, a layoff or early retirement and take at 12%. Missing either deadline triggers a 25% excise tax on the shortfall. (This default-beneficiary trap is one of nine quiet IRS rules that can drain a six-figure retirement account, all mapped in our free guide here: The Retiree’s Tax Trap Map.)
One catch: when the owner dies on or after the required beginning date, an estate instead withdraws over the owner’s life expectancy, reduced by one each year. The older the owner, the shorter that horizon.
Three Beneficiary Fixes That Take Ten Minutes
- Name primary and contingent beneficiaries on every account. That includes Roth IRAs. An estate-owned Roth still has to be emptied early, which throws away years of tax-free growth.
- Re-file after every rollover, transfer, divorce or death. A new account at a new firm starts with a blank beneficiary line.
- Read your firm’s default clause and confirm what’s on file. Minor children named directly count as eligible designated beneficiaries until they reach majority. After that, they get 10 years.
If your plan involves trusts, minor children or a large IRA, run these numbers with a qualified financial professional or tax specialist.
Contact [email protected] for any questions or corrections.
Vilma Rios is a tax professional, tax researcher, and financial writer with more than 15 years of experience in tax and accounting. Her work spans federal tax research, financial journalism, retirement planning, investment taxation, capital gains, inherited assets, and tax education. She specializes in translating complex tax and financial topics into clear, practical information that helps individuals, families, retirees, and investors make informed decisions.
She has presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as "Your Tax Geek," Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
