We work our entire lives to save for a comfortable retirement, often using tools like 401(k)s and Individual Retirement Accounts (IRAs) to help us grow the money we put aside. The expectation is to use these funds as a source of income after leaving the workforce, but it is possible that an IRA owner (benefactor) may pass away before spending the assets inside their account. For this reason, there are a few crucial pieces of information that IRA owners and potential heirs must be aware of in order to avoid costly mistakes.

IRAs Avoid Probate

Traditional IRAs are different from other assets because they don’t go through the probate process after a benefactor’s death. Instead of being distributed in accordance with their will, the money is distributed according to a beneficiary form that the owner signed with the bank, brokerage or mutual-fund company.

While this characteristic can make it seem like inheriting an IRA is pretty straightforward, Ed Slott, an expert on IRAs, emphasizes the contrary. Because these accounts are tax-advantaged, there is a great deal of red tape that must be carefully navigated before any funds are moved or touched. “This money comes with restrictions and rules and penalties and taxes,” says Slott. “There are important tax implications to understand. One wrong move could cost you a bundle.”

The Beneficiary Form Rules

Advance planning is key to navigating IRA inheritance issues. When you open a new IRA, the brokerage firm, bank or mutual-fund company will ask you to sign a beneficiary form. This is the document that rules how your IRA will be distributed to your heirs.

Beneficiary forms can be updated regularly without consequence. Changes in beneficiary can be made to reflect certain life events, such as a divorce or the death of a spouse, or to reflect new estate planning strategies.

The beneficiary form allows for naming a primary beneficiary (or multiple primary beneficiaries) as well as contingent beneficiaries (alternates) who will receive specified shares in the event primary individuals are deceased. If there is more than one beneficiary, consider dividing the IRA by percentage instead of dollar amounts to avoid any confusion.

Be sure to print and keep a copy of the beneficiary form so heirs can find it in case the financial institution that has custody of your IRA is unable to locate it.

Selecting a Beneficiary

If you and/or your spouse are retired or you care for someone who is, treat this as an opportunity to discuss who might benefit the most from an inherited IRA. There are different rules and options for inheriting an IRA that depend on the number of beneficiaries, their ages, their relationship to the benefactor and the benefactor’s age at the time of death. In addition to family members, non-relatives, charities, trusts, and any combination of these options can all be named on beneficiary forms.

For married couples, the most common choice is to name one another as beneficiaries since this offers the surviving spouse a source of financial stability. Children are a common selection as contingent beneficiaries. However, if either spouse will have sufficient assets and income after the other passes away, consider naming another family member.

Perhaps you have a grandchild who is pursuing an expensive college degree and could use some help paying for their education, or perhaps another member of your family needs money for a difficult health challenge. Both of these are examples of scenarios where it may be wise to reevaluate beneficiary selection.

Browse Our Free Senior Care Guides

Stretching an IRA

The benefit of naming younger individuals, such as grandchildren, as the beneficiaries of an IRA is that they get to stretch out required minimum distributions over their own lifetimes. Because their actuarial life expectancy is so much longer than someone late in life, the required minimum distributions they must take are much lower. This means the majority of the funds in the account will continue to grow tax-deferred over a longer period of time. For example, Slott estimates that a one-year-old grandchild who inherits a $100,000 IRA earning 6% annually will receive more than $2.3 million over their life expectancy of about 80 years.

What to Do if You Inherit an IRA

Slott urges clients who inherit an IRA to do nothing without consulting an expert because the decision may be irrevocable and/or create a huge tax bill. For example, if you transfer the assets from one IRA to another, be sure it’s a direct transfer from one trustee financial institution to another. If you take the money out, even if you deposit it later in another IRA, the entire distribution is taxable. “Touch nothing, like a murder scene,” he cautions. “If you touch it the wrong way, it’s taxable.”

If you are a spouse who inherits an IRA, you can leave it as is and treat it as your own, or you can roll it over into your own IRA. You can also transfer the assets into an inherited IRA account, which would require distributions based on your deceased spouse’s age if he or she was 7012 or older at the time of death. If your spouse was younger than you when they passed away, you can delay distributions until they would have turned 7012. Consider these options carefully because they depend on your age, your deceased spouse’s age and whether you need the money or want it to continue growing tax-free.

Read: Older IRA Owners: Distributions Are Required

If you inherit an IRA from someone who is not your spouse, you cannot roll over the assets into your own retirement account. Instead, you must set up an inherited IRA or arrange for a lump sum distribution. If you choose to set up an inherited account, you must begin taking required minimum distributions by December 31 of the year following the owner’s death. The amount of these distributions is based on your own life expectancy if the benefactor was younger than 7012 when they died. If they were 7012 or older at the time of death, then the distributions are based on the longer of either their remaining life expectancy or your life expectancy.

If you inherit an IRA, but would prefer to avoid the tax implications, it is possible to disclaim the inheritance. This decision must be made within nine months of the date of death. The contingent beneficiaries will then inherit the IRA, not someone you designate.

Where to Look for Help

Consider getting expert advice to navigate the rules. Even if you are sure of how you want to proceed, there are still pitfalls to avoid. If you make a mistake, the IRS won’t let you undo it. “It’s like an egg shell: You break it and there’s no turning back,” Slott explains.

Use a financial advisor or estate planning attorney who has experience specific to IRA inheritance. Slott has trained hundreds of financial professionals on the intricacies of IRAs and tax laws, and you can find one using his website. As a final step, consult your tax advisor or CPA before taking any action.