Individual Retirement Arrangements (IRAs) can be a great way to save for retirement because of the tax benefits they may provide. If you’re eligible, you can choose a traditional IRA for an up-front tax deduction and defer paying taxes until you take withdrawals in the future. Or if eligible, you might opt for a Roth IRA and contribute after-tax money in exchange for tax-free distributions down the road.

If you run afoul of some of the IRS rules surrounding these accounts, the penalties can be quite stiff—all the way up to a disqualification and taxation of your entire account if you’re not careful. Ignorance of the law is no excuse, and with very few exceptions the IRS isn’t forgiving of mistakes. These mistakes fall into the categories of contributions, withdrawals and estate planning, which we will discuss in separate articles.

These are the common IRA mistakes that occur related to estate planning:

You should designate your IRA beneficiaries with care because, as is the case with employer plans and life insurance, your beneficiary will have control over and access to your account no matter what your will or revocable living trust might say. Beyond that, beneficiaries need to be careful about how and when they access IRA funds. Ideally, you want to defer withdrawals for as long as the law allows, in most cases, but the rules surrounding inherited retirement account balances can get complex, depending on whether the recipient is a spouse or non-spouse and whether the original account holder had begun taking required minimum distributions (RMDs) at the time of death. Given the right set of circumstances, a beneficiary may be able to “stretch out” the IRA distributions over his or her lifetime and, potentially, the lives of successive beneficiaries (see the table below).

Naming a trust as your IRA beneficiary

In the vast majority of cases, naming your spouse as primary beneficiary provides the greatest flexibility. The next best route is to name a non-spouse beneficiary such as a child, grandchild, or even a favorite charity. In very few cases, where there are concerns over the capacity or maturity of a beneficiary, or some other situation in which you want to put controls and restrictions in place, it might make sense to name a trust as your IRA beneficiary.

Naming a trust as beneficiary can lead to all kinds of unintended consequences if you’re not very careful. For example, naming a trust instead of a spouse as beneficiary removes the surviving spouse’s ability to roll over the IRA into his or her name to take advantage of the IRA ownership rules. In contrast, a trust is not a natural person and must make RMDs over the life expectancy of the oldest trust beneficiary.

Another pitfall arises if a charity is named as a co-beneficiary of an IRA trust, in which case the entire IRA would need to be distributed within five years of the date of death of the IRA owner (if death occurs before age 70½), or over the remaining life expectancy of the IRA owner if the owner had reached the age of 70½.