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Americans have trillions of dollars locked away in traditional individual retirement accounts and 401k's. It should come as no surprise, then, that the largest asset you own might just be your retirement account. But your inheritance plans for those retirement savings could contain huge and expensive mistakes that may cost your family hundreds of thousands of dollars.

The main culprit? A poorly planned distribution strategy. You could have the best investment approach ever designed, but improper or incomplete estate planning could mean that your intended beneficiaries never get, or get only a small portion of, what you've saved.

If you've accumulated a significant amount of wealth in your tax-deferred retirement accounts, here are three critical mistakes to avoid in setting up your IRA or 401k as a lasting legacy.

No. 1: Imprudent investment strategies

One of the most common investment mistakes is taking an unhealthy level of risk with your retirement accounts. If you lose 50% of your savings because of a market crash, your legacy will not last as long as you had intended. Control risk with IRAs that have conservatively tilted investment strategies. Remember that the money you lose in an IRA is not tax deductible, unlike with other types of investment accounts.

No. 2: Incorrect custodial and trust documents

Dust off your IRA custodial document and double-check the fine print to verify whether your beneficiaries are barred from receiving your IRA inheritance as a lump sum. Here's why: If a non-spouse beneficiary, such as a child, chooses to receive your IRA as a lump sum, almost half of what you've saved could go to the government.

Say, for example, you have a $450,000 IRA, and your primary beneficiary is your child. The account would be subject to ordinary income taxes, which at current tax rates equal as much as 40% -- or $180,000 -- between federal and state taxes.

If you have a living trust, things get a little hairier because very few trusts are designed to avoid the tax bite on an IRA inheritance. But the good news is that under IRS publication 590, spouses have virtually unlimited options when they inherit an IRA, including taking lump-sum distributions.

No. 3: Incomplete information for all beneficiaries

Verify that you have primary and contingent beneficiaries listed on all of your retirement accounts. There is a difference between named beneficiaries and designated beneficiaries. It's not enough to list generic beneficiaries such as "my living spouse" as primary and "my living children" as contingent beneficiaries. You must specify the names, dates of birth, Social Security numbers, etc. of all your beneficiaries.

I once read that the average time it takes a beneficiary to cash out an inherited IRA is a whopping 93 days. By following the simple steps above, you may be able to shave a few days -- or weeks -- off that time when your family really needs it.

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