While annual contributions to individual retirement accounts (IRAs) are still relatively modest, the ability to roll over 401(k) balances to an IRA can result in significant account balances for many investors.

IRAs are thus becoming estate planning tools for investors who don’t use the entire balance during their lifetimes. If you are in that situation, make sure your heirs know how to avoid some common IRA mistakes:

Using the IRA balance too quickly.

After an IRA is inherited, a traditional deductible IRA still retains its tax-deferred growth and a Roth IRA retains its potentially tax-free growth. Your beneficiaries’ goal should be to extend this growth for as long as possible. If the IRA has a designated beneficiary, which includes individuals and certain trusts, then the balance can be paid out over the beneficiary’s life expectancy. Spouses have additional options which can stretch payments even longer. Your heirs can also elect to take the entire balance immediately, paying any income taxes due. Make sure to stress to heirs the importance of taking withdrawals as slowly as possible.

Not splitting the IRA when there are multiple beneficiaries. 

When there are multiple beneficiaries, you can split the IRA into separate accounts by Dec. 31 of the year following the original owner’s death. If the account is not split, distributions must be taken by all beneficiaries over the life expectancy of the oldest beneficiary. By splitting the IRA into separate accounts, each beneficiary can take distributions over his or her life expectancy.

This is especially important to a surviving spouse, who can only roll over the IRA to his/her own account if he/she is the sole beneficiary. With the rollover IRA, the surviving spouse can name his/her own beneficiary, thus expending the IRA’s life, and can defer payouts until age 70 1/2. When other than an individual or qualifying trust is one of the beneficiaries, the IRA must be distributed within five years when the owner dies before required distributions begin or over the owner’s life expectancy when the owner dies after required distributions begin.

Separating the account or paying out the non-individual’s portion then allows the individual beneficiary to take distributions over his or her life expectancy.

Rolling the balance over to a spouse’s IRA too quickly.

Once a spouse rolls over the balance to his/her own IRA, some planning opportunities are eliminated. While the IRA balance can typically be spread out over a longer period when the balance is rolled over, the spouse may need distributions.

For instance, spouses under age 59 1/2 may make withdrawals from the original IRA without paying the 10 percent federal income tax penalty. Once the account is rolled over, withdrawals before age 59 1/2 would result in the penalty.

Also, spouses who are older than the original owner can delay distributions by retaining the original IRA. The surviving spouse does not have to take distributions until the deceased spouse would have attained age 70 1/2, even if the surviving spouse is past that age. The spouse may want to disclaim a portion of the IRA, which must be done within nine months of the original owner’s death. If the account is rolled over, that disclaimer can’t be made. Thus, it is usually best for the surviving spouse to determine his or her financial needs before rolling over the IRA balance.

Not properly establishing the inherited IRA.

An inherited IRA must be retitled to include the decedent’s name, the words individual retirement account, and the beneficiary’s name. The IRA cannot simply remain in the decedent’s name. The beneficiaries should also designate beneficiaries for their IRAs.