One basic new rule was that if a son, daughter, siblings, unmarried partners, and other non-spouse beneficiaries inherit a 401(k) account, they can now, according to the new Pension Protection Act, minimize the up-front tax bill by withdrawing the money over their lifetime. Before this rule change, beneficiaries had to withdraw the entire sum and pay the taxes typically within five years. Spouses, on the other hand, have always been free to transfer inherited 401(k)s to an IRA and stretch the withdrawals - and tax bills - over their own life expectancies.

According to a new IRS Ruling:

Beneficiaries have to transfer their inheritances from an inherited 401(k) plan to an IRA by a specific date, namely the last day of the year after the year in which the account owner dies.

The 401(k) plan must decide whether whey want to offer the new benefit. The ruling lets employers choose whether to amend their 401K) plans to make IRA transfers available. Because of the cost of the change, most employees have not amended their retirement plans.

Under the new rules any non-spouse who inherits money from a 401(k) must transfers the account to a properly titled IRA. To do this you must set up a separate inherited IRA to receive the rollover funds. But note: This new rule applies to distributions made after the end of 2007.

The best way to avoid these problems? First check with your benefit office and see if your company retirement plan has changed the rules to allow your heirs to transfer your 401(k) money directly to an IRA. But the best bet of all is when you retire or leave a job; transfer your company 401(k) plan to an IRA. That gets your nest egg out from under an employer's rules. - www.financialsavvy.com