About a third of all U.S. households own at least one individual retirement account these days, and while the amounts in those accounts are usually modest, a growing number of them turn out to contain six- and even seven-digit sums.

These super-large accounts are not, of course, the result of socking away $2,000 a year, the maximum annual contribution for an individual. Instead, the really big ones typically are the result of rollovers from employer-sponsored retirement programs, such as 401(k) plans.

Generally, these really big nest eggs provide more than enough retirement security for their owners. As a result, they are inspiring many of the lucky families to look for ways to use them as estate-planning devices--something policymakers have long sought to discourage.

It isn't easy. Required distributions, coupled with complex rules and harsh penalties, along with estate and income taxes, can enable the tax collector to gobble up the bulk of the assets unless special care is taken. Some studies have found that, in a worst-case scenario, taxes on a large retirement account at the owner's death can top 90 percent.

But while complexities and tax traps still abound, several recent law and policy changes have made it easier to spread IRA tax benefits across more than one generation.

The major change, of course, has been the introduction of the Roth IRA. Roth contributions are not deductible, and converting a traditional IRA to a Roth generates taxes, but there are no further income taxes, either on the earnings in the account or on withdrawals in retirement.

This feature has encouraged some older IRA owners--those wealthy enough not to need the account's funds--to convert big accounts to Roths and name a child or grandchild as the beneficiary. At the death of the account holder, the young beneficiary can draw the money out in a tax-free stream of income over a lifetime.

Conversion is not practical for many people, but many parents would still like to pass on money from their traditional IRAs to their children or grandchildren, assuming there is some left at the older generation's death.

For such families, two other changes are noteworthy.

Earlier this year, the Internal Revenue Service issued a private-letter ruling giving a Colorado man the go-ahead to name his own beneficiary for a large IRA account he had inherited from his mother. Naming a new beneficiary would extend the life of the IRA beyond the man's own life, should he die while the account still had assets.

This really isn't a change, said Ed Slott, a Rockville Centre, N.Y., certified public accountant who specializes in IRAs and publishes a newsletter, Ed Slott's IRA Advisor.

"The IRS all along included language to allow that," Slott said. The significance is that many financial institutions refused to do it and insisted that the IRA be closed and all assets distributed to heirs upon the death of a non-spouse beneficiary. That triggers income tax on the account, ending its tax-deferred status.

"Some financial institutions were comfortable" with allowing new beneficiaries and "some weren't," Slott said. "Now more will get comfortable."

Slott said account holders should check with the mutual fund or other institution that holds their IRA to see what it allows. "If your institution doesn't do it, bring your million dollars somewhere else," he said.

In the other change in late 1997, the IRS altered its proposed rules on the naming of a trust--an entity that can hold assets under the supervision of a trustee--as an IRA beneficiary, easing a provisional rule that made trusts very inconvenient, even risky, to use.

(Note that the rules governing disposal of IRA assets are merely proposed and have been that way for many years. As such they lack the force of a formal regulation, which makes some experts nervous about making long-term plans based on them. Since no one knows when final rules will be forthcoming, however, there is little choice but to work with the proposed ones.)

In general, it is desirable to keep assets inside the IRA as long as possible, giving them the best chance to grow tax-deferred. Minimum withdrawals are required after the owner reaches age 70 1/2, with the amounts determined by the life expectancy of the owner or the owner and the beneficiary.

Spouse beneficiaries, upon the IRA holder's death, can roll the account over into their name and use their life expectancy to determine how fast assets must be withdrawn. Beneficiaries who are not spouses may be able to use their own life expectancy to make withdrawals.

In an ideal situation, the IRA owner's spouse doesn't need the money, so the owner names the children as beneficiaries. When required distributions begin, the life expectancy used to calculate them is a combination of the owner's age and the children's. (The children are deemed to be no more than 10 years younger than the owner, however, a rule designed to accelerate tax collection.)

This is an advantage, because the longer the life expectancy, the smaller the required distributions and the longer the bulk of the money remains in the tax-deferred account. In most cases, no trust is needed to accomplish this, and many experts advise against using one.

When the beneficiary is a minor child or disabled, however, a trust may be desirable.

"Most people should not have a trust as a IRA beneficiary other than in certain situations. A minor beneficiary is one of them. You name a trust [as beneficiary] for the same reasons you would need a trust for any other asset," Slott said.

In the past, one of the difficulties was an IRS requirement that a trust be irrevocable by the time the person setting it up reached age 70 1/2. This means that using a trust required setting up something that could not be changed--too risky for many people.

The new proposed rule allows trusts to be irrevocable as long as they specify that they become irrevocable at the IRA owner's death. This allows much more flexibility, making trusts more attractive for those who need them.

But several experts warned that the rules remain complex, so IRA trusts should be set up by someone familiar with them, and they should be separate from other trusts the person may already have or is considering.

None of this solves all the problems associated with IRAs, of course, and people with large sums piled up in them should treat them as important family assets. Fail to plan, Slott said, "and all you're doing is building a savings account for the government."

The accounts are fairly flexible until you reach 70 1/2 (or until you die). Then changing things can be tough or impossible. Thus, it makes sense to start planning early. Experts recommend taking several steps as early as possible.

First, decide what you really want to accomplish. Is it providing retirement income for yourself? For your spouse? Or is it passing along the greatest possible amount to children or grandchildren?

With that in mind, examine your income and tax situation to try to decide when to start taking distributions. You are allowed to start taking penalty-free distributions of any size at age 59 1/2, and you must start taking required minimum distributions at age 70 1/2. Sometimes taking modest distributions early can be helpful. For example, waiting could allow your account to grow and make your mandatory distributions larger. That could kick you into a higher tax bracket, especially on your Social Security benefits.

Then work out the best beneficiary arrangement. Consider your spouse's income needs, health and likely estate tax situation. You can have multiple beneficiaries, including grandchildren (though you have to watch out for the generation-skipping transfer tax if you have a lot of assets), and that can be advantageous.

Finally, think about what method you will use for calculating your required minimum distributions at age 70 1/2. There are several allowable methods that result in larger or smaller distributions. Smaller distributions may seem appealing, but those methods often don't work as well for heirs.

If you have or expect to have a really big IRA, get expert help. In fact, you may need several experts to work out the distributions and the income tax and estate tax consequences. All that expertise may be expensive, but with $1 million or more on the table, a mistake can be even more expensive.

A Look at IRA Owners

An estimated 30.6 million U.S. households owned various types of individual retirement accounts as of mid-1998. Here are some characteristics of those households:

Traditional Roth Employer-

Median IRA IRA sponsored IRA

Age of head of

household 52 39 47

Household

income $60,000 $68,500 $62,800

Number of children

under age 18 0 1 1

Household financial

assets $100,000 $97,100 $107,800

Percent of households

Married 68% 74% 75%

College or

postgraduate degree 57 57 55

Employed full-

or part-time 69 90 77

Retired from lifetime

occupation 30 11 22

NOTE: Roth data is for the first four months of 1998 and may not represent the population that purchased or converted to a Roth IRA by year-end 1998.

SOURCE: Investment Company Institute