Fidelity, Schwab, and Vanguard Each Use a Different Backup Heir When No Beneficiary Is Named, and That Choice Can Mean Five Years to Withdraw Instead of Ten

Two widowed parents leave the same $600,000 IRA to their children without ever naming a beneficiary. One family gets time to plan, while the other gets a probate filing and a tax deadline. It all comes down to a single line in the custodian’s fine print.

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Imagine two widowed parents. Each leaves a $600,000 traditional IRA to two adult children, but neither parent ever completed a beneficiary form. In one case, the heirs have 10 years to take distributions on their own timetable. In the other, they face a five-year clock, a probate filing and a quicker tax hit.

The difference is a detail many savers never notice: the default beneficiary language in the IRA custodial agreement. Fidelity, Charles Schwab (NYSE:SCHW | SCHW Price Prediction) and Vanguard each use their own version. If the beneficiary line is empty, that language determines who receives the account, even if a will says otherwise. Whether the clause points to a person or to the estate also determines which withdrawal schedule applies.

Who Gets a Blank IRA Depends on the Custodian’s Default Rules

Custodial agreements normally set out a backup sequence for accounts with no beneficiary on file. The surviving spouse is usually first. After that, the rules diverge. Some agreements pass the account to children or descendants, while others direct it to the estate.

This issue affects widowed, divorced and single owners most, as well as couples who die close together. Households headed by people ages 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 appeared on 5,041 of the 7,195 estate tax returns filed in 2024.

Why Section 401(a)(9) Can Cut the Payout Period in Half

Tax law says only a person can be a “designated beneficiary.” The statute defines that as “any individual designated as a beneficiary by the employee” (26 U.S.C. § 401(a)(9)(E)(i)). An estate does not qualify.

That distinction changes the timetable. 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)). If adult children are named directly, they get 10 years. If the owner dies before required distributions begin and the account passes to an estate, the original rule applies instead: the full balance must be distributed “within 5 years after the death” (§ 401(a)(9)(B)(ii)).

A will can leave the estate’s share to the children, but the children still inherit the five-year timetable. After death, no one can simply add a new beneficiary either. IRS Publication 590-B says the beneficiary must be named as of the date of death, and the September 30 deadline the following year only allows existing beneficiaries to be removed.

A $600,000 IRA Shows the Cost of the Wrong Default

Assume a widowed owner dies at age 70, before the required beginning date under current law. She leaves a $600,000 traditional IRA split evenly between two adult children. To keep the example simple, ignore investment growth.

Now assume one child already has $70,000 of taxable salary income as a single filer. The 22% bracket ends at $105,700.

• 10-year path: each $30,000 withdrawal stays within the 22% bracket. That produces $6,600 in tax per year, or $66,000 over the full period.
• 5-year path: part of each $60,000 withdrawal is taxed at 22% ($7,854), and the remainder is taxed at 24% ($5,832). That totals $13,686 per year, or $68,430 over the five years.

The five-year route costs $2,430 more in federal tax per child before any state income tax is added. Only the income above the bracket threshold is taxed at 24%. Heirs already in the 32% bracket would pay even more under the tighter schedule.

Tax is only part of the story. The estate route also sacrifices five years of tax-deferred growth and brings probate into the process. It removes flexibility too. If the owner dies before her required beginning date, a 10-year heir does not have a required distribution in any year before the 10th year. That can allow the heir to wait for a sabbatical, a layoff or early retirement and take withdrawals at a lower rate. Missing either deadline can trigger 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.

There is one important exception: if the owner dies on or after the required beginning date, an estate withdraws over the owner’s life expectancy, reduced by one each year. The older the owner, the shorter that period becomes.

Three Beneficiary Fixes That Take Only a Few Minutes

1. Name primary and contingent beneficiaries on every account. That includes Roth IRAs. An estate-owned Roth still must be emptied sooner, which gives up years of tax-free growth.
2. Update the form after every rollover, transfer, divorce or death. A new account at a new firm starts with no beneficiary listed.
3. Check your firm’s default clause and verify what is on file. Minor children named directly count as eligible designated beneficiaries until they reach majority. After that, they receive the 10-year rule.

If your estate plan involves trusts, minor children or a large IRA, review the numbers with a qualified financial professional or tax specialist.